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Study raises concerns about stock price quotes
* Direct feeds provide crucial time advantage for traders
* For best execution, direct feeds eliminate lags -study
* Gap widens in quote dislocations as volatility rises
By Herbert Lash
NEW YORK, June 29 (Reuters) - New research released this week raises fresh concerns about the usefulness of a stock-price quoting system sanctioned by U.S. regulators.
Specifically, the price differential between the "publicly" available best offer for a stock and what traders see via direct feeds from exchanges can be 3-1/2 cents on volatile days, according to data by researchers in California and New York.
U.S. stock exchanges must send the best bid and offer for a stock to an aggregator of prices known as the Securities Information Processor, or SIP, which is then disseminated for a nominal fee to brokerages and vendors, among others.
But exchanges also sell the same stock quote directly to proprietary trading outfits, money managers or anyone else willing to pay a higher fee, a service that is far faster than the "public" feed - yet more expensive.
The latency differential - the lag in time it takes for data to travel - results in a noticeable price gap, according to research by Terrence Hendershott, an associate professor at the University of California-Berkeley's Haas School of Business. Hendershott was aided by a student and an employee at software developer Redline Trading Solutions Inc in New York.
The researchers plan to submit their study to academic journals.
The gap widens on volatile days, and has a correlation with Wall Street's so-called fear gauge, the CBOE volatility index or VIX, said John Hanna of Redline.
The differential is a strong argument for any firms involved in trading to gain access to direct feeds, which may include "depth-of-book" prices - the full gamut of bid and offers that customers have submitted - and the "top of book" quotes that the Berkeley-Redline research focused on, Hanna said.
"When we see large periods of market volatility and large economic events, that's when we see these gaps being the largest," he said. "That's when we feel it's the most important for firms to have access to direct feeds" and use of low-latency infrastructure, he said.
On May 9, for example, when Spain took over Bankia, the country's fourth-largest bank, the price differential between quotes on the direct feed and the SIP for shares in Apple Inc in early morning trading at times was nearly 5 cents.
Similar price dislocations were noticed throughout a spectrum of Nasdaq-listed stocks that were researched, Hanna said.
The cost of direct feeds - upward of $1 million or more a month - can create a perception of "haves" and "have nots" in the marketplace, Bill O'Brien, CEO of U.S. exchange Direct Edge, said in congressional testimony last week.
O'Brien called for broadening the availability and lowering the price of depth-of-book feeds, data that has become more critical for investors over the past decade as the use of algorithms and automated trading has become the norm.
"There could be a very interesting cost-benefit analysis on getting rid of the SIP. No one's done that, so I can't say if it would be more or less expensive, but I think it's a question," said Adam Sussman, research director at TABB Group.
Another question created by the drag in quotes disseminated by the SIP is their relevancy, Sussman said. "Is that really the price that people should be looking at?" he said.
TABB has called for a national depth-of-book feed that could be disseminated over the SIP. Sussman said the cost of direct feeds and the infrastructure needed to reduce the time it takes for data to travel, a concept known as latency, has fallen in recent years.
"The SIP is something we all pay for, but no one uses," Sussman said, citing a common refrain on Wall Street. (Reporting by Herbert Lash; editing by Matthew Lewis)
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