On Thursday, the Wall Street Journal reported on a controversy surrounding Intellicator, a proposed Nasdaq options data service that would leak sensitive trading information that investors assume would be private.
What the article does not say is that selling out investors’ data to traders looking for an edge is a practice that’s been going on for years and is still happening today.
Nasdaq Velocity and 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.” They marketed these feeds as offering “unique data that doesn’t show up in a traditional quote feed” which could be used to “detect surges in trading interest before trades occur” (emphasis added). These feeds didn’t just include a new packaging of public data. According to Nasdaq’s website, they incorporated “displayable orders and non-display orders,” including indications of routable orders and even unfilled IOC (immediate-or-cancel) orders — information that would otherwise be deemed private.
Non-displayed orders are meant to be hidden from view. IOC orders in particular are designed to be executed immediately or cancelled back to the sender without leaving a footprint behind. Nasdaq violated those basic principles for a quick buck.
For 11 years, Velocity and Forces exposed investors and brokers to potential electronic front-running.
Nasdaq’s “Market Pathfinders” data product — which is still on the market — is described as an equity market data feed that tracks and discloses the number of shares purchased and sold by select participants with the goal of “monitor[ing] 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.
Pathfinders directly undermines those efforts. It reassembles and sells those signals of large interest, at the expense of large traders and investors.
Covering their Tracks
In late October, Nasdaq removed Velocity and Forces from their website and withdrew the feed with notice to the SEC. Some may argue that since they are off the market, the book is closed on those feeds.
But they didn’t disappear because Nasdaq suddenly saw the light.
Nasdaq only removed Velocity and Forces after industry participants who came across the feeds started asking questions. Indeed, Nasdaq even notes in its rule filing withdrawing the product that “customers expressed concern that data contained in the product may reveal too much information about the trading strategies of participants on the Exchange.”
Nasdaq also tried to downplay the issue by claiming in the filing that there was low demand for the feeds. We encourage them to disclose which Nasdaq Members purchased those data feeds and how much volume those firms executed on Nasdaq since buying the product. Additionally, we hope that Nasdaq will thoroughly review its existing data products and rethink the decision to offer products like Pathfinders and Intellicator.
Enough is Enough
These feeds betrayed the trust investors and brokers place in Nasdaq. If Nasdaq were a dark pool, brokers and investors would shut it off overnight. There would be accountability for these actions.
Because Nasdaq is an exchange, some might claim that they can’t avoid trading there. But this is only partially true.
By regulation, when taking liquidity with a marketable order, brokers must send their order to the venue with the best price, even if that is Nasdaq. But brokers and investors do have a choice about where they post limit and non-displayed orders.
Currently Nasdaq is the #1 exchange in the U.S. by market share, accounting for ~14% of U.S. equity trading. Like the other maker-taker exchanges, much of its market share is driven by brokers choosing to post orders on their market — which is not required by regulation. In fact, public data shows that lining up at the end of the line on Nasdaq may be one of the worst decisions a broker can make when it comes to trading quality. Nasdaq is also one of the largest exchanges for non-displayed trading in the U.S. — even though signals of non-displayed orders were being purposefully leaked for 11 years.
The question to the industry is: will you continue to post limit orders or non-displayed orders to Nasdaq?
Enough is enough. It’s your order and your choice.
 Quotes from now-deleted Nasdaq marketing materials.
 If at least 75% of a Nasdaq member’s volume is buying activity, the firm is involuntarily denoted as a Pathfinder — the same holds true if it was selling activity. Once there are at least three Pathfinders buying and three Pathfinders selling in a stock, Nasdaq disseminates a message indicating the count of Pathfinders on each side as well as the total shares they’ve bought or sold in the last one minute, five minutes, and 60 minutes. If the count of Pathfinders drops below three buyers or three sellers, Nasdaq broadcasts an alert, notifying subscribers that Pathfinders have stopped trading a particular stock (Source: Nasdaq).