Price Discovery and the Accuracy of Consolidated Data Feeds in the U.S. Equity Markets

TL;DR

This paper examines the accuracy of the U.S. equity market's consolidated data feed (SIP), revealing significant inaccuracy and out-of-sequence reporting that can distort market measures and potentially hinder effective price discovery.

Contribution

It provides the first detailed analysis of SIP accuracy using trade and quote data, highlighting its divergence from direct feeds and its limitations in high-volume trading environments.

Findings

Up to 60% of trades are reported out of sequence in high-volume stocks.

The SIP's inaccuracy can distort return calculations and market analysis.

The current infrastructure struggles to keep pace with modern trading activity.

Abstract

Both the scientific community and the popular press have paid much attention to the speed of the Securities Information Processor, the data feed consolidating all trades and quotes across the US stock market. Rather than the speed of the Securities Information Processor, or SIP, we focus here on its accuracy. Relying on Trade and Quote data, we provide various measures of SIP latency relative to high-speed data feeds between exchanges, known as direct feeds. We use first differences to highlight not only the divergence between the direct feeds and the SIP, but also the fundamental inaccuracy of the SIP. We find that as many as 60 percent or more of trades are reported out of sequence for stocks with high trade volume, therefore skewing simple measures such as returns. While not yet definitive, this analysis supports our preliminary conclusion that the underlying infrastructure of the SIP is currently unable to keep pace with the trading activity in today's stock market.