Nasdaq’s under attack over a product that could expose big traders — but one rival says it has been doing this for years

Nasdaq CEO Adena Friedman.

caption
Nasdaq CEO Adena Friedman.
source
John Lamparski/Getty Images

  • Nasdaq is preparing to launch a new data product called Intellicator, which aims to read sentiment toward different segments of Nasdaq’s options market.
  • That’s prompted criticism from rivals. Startup exchange IEX published a blog Monday calling out Nasdaq for “selling out investors” in order to make money.
  • Nasdaq, which is best known as a US equities exchange operator, has made data a focus of its business.

“Enough is enough.”

IEX, the startup stock exchange, isn’t a fan of Nasdaq’s latest foray into data. The exchange operator’s newest product – called Intellicator – has raised opposition from a number of market participants, including IEX and SIFMA, a large organization representing big trading firms. The objections are all basically around the idea that the product might give away information about large firms’ trading strategies in one of Nasdaq’s options markets.

But IEX, which was made famous in Michael Lewis’ “Flash Boys,” says Intellicator is just the tip of the iceberg.

In a blog post published Monday, IEX’s Eric Stockland called out Nasdaq for over a decade of selling data products, which they say “sell out” investors in favor of traders.

“Market Velocity and Market Forces”

“For 11 years – up until two weeks ago – Nasdaq sold data feeds called “Market Velocity” and “Market Forces” as part of a “Market Analytics Data Package,” Stockland said.

Those data feeds incorporated information that most brokerage firms would have expected to be private, according to IEX. The two products were recently discontinued by Nasdaq.

They incorporated “displayable orders and non-display orders, providing unique data that doesn’t show up in a traditional quote feed,” according to an archive of now deleted marketing materials by Nasdaq.

Non-display orders include things such as immediate-or-cancel orders, according to IEX. Such an order allows a trader to essentially “ping” Nasdaq’s stock exchange to see if they can execute a trade. If they can, then the order goes through immediately. If there’s not enough stock readily available to be bought or sold, then the order cancels.

“Non-displayed orders are meant to be hidden from view,” according to IEX. “Nasdaq violated those basic principles for a quick buck.”

A filing to the SEC indicates that Nasdaq customers expressed concerns about “Market Velocity and Market Forces.” Here’s the relevant passage from the filing (emphasis added):

“Recently, customers have inquired about possible modifications to the product. Specifically, customers expressed concern that data contained in the product may reveal too much information about the trading strategies of participants on the Exchange.

The exchange said it did not find such concerns “well-founded.”

IEX also called out Nasdaq Pathfinders, a product that aims to help subscribers “[monitor] the buying and selling of market participants (‘pathfinders’) to identify those that are aggressively taking a position over an extended period of time.”

“To minimize market impact, investors do everything they can to disguise their intentions – including breaking up large orders into smaller ones so they aren’t obviously coming from a large investor,” IEX said. “Pathfinders directly undermines those efforts.”

Data has quickly become an important area of profit for exchanges and a point of contention on Wall Street.

Big traders have long accused Nasdaq and its rival the New York Stock Exchange for unfairly spiking the cost of their proprietary market data, which market-makers claim is essential to competing in the trading business.

Revenues brought in from data have increased for Nasdaq from $337 million in 2012 to $427 million in 2016, according to the exchange. Nasdaq is putting more capital behind data products, according to its updated strategy.

Investors have responded positively to the move. Nasdaq’s stock is up more than 13% since the beginning of the year.

Nasdaq says they have the law on their side

Nasdaq declined to comment on the specifics of the blog.

But Oliver Albers, head of sales and account management for Nasdaq’s Global Information Services, however, told Business Insider that the SEC has encouraged exchanges to create products that make markets more transparent.

“Nasdaq has a history of innovation in the data products space and takes great care to consult with our customers to ensure our products cannot be used in a way that would be harmful to the market,” Albers said.

He said the firm has the Securities and Exchange Commission on their side. Here’s Albers in a statement to Business Insider:

“For many years, the industry has alleged that exchanges have market power over data, but when the SEC’s Chief Administrative Law Judge looked at that issue, she ruled that market data pricing is subject to competitive forces.”

To be sure, there are a number of market participants who welcome these products. Milind Sharma, CEO of QuantZ Capital, a hedge fund, told Business Insider these type of products give the market color.

“Greater transparency and more granular information about market microstructure ought to be an unadulterated good for making markets efficient,” he said.

Sharma, the head of smaller investment shop, said he would benefit from a product like Intellicator because it provides his firm with a view of the market that is typically only available to larger firms.