The Addictive Drama of SEC Release №34–88216

I must admit, I’m quickly running of out things to do in isolation. I have tried all the typical advice — I have baked bread that did not taste as good as store-bought bread. I have scrolled through crafty kits on etsy and left them to be purchased by more nimble-fingered people. I have broken out my juggling equipment, and written my downstairs neighbors an elaborate apology note. And so it is with great joy that I announce to you: I have now found the answer! I have found a tale of human drama that is as deep as it is long, and it surely can engage us all for many days to come.

You think I’m talking about Tiger King? Don’t be silly. That fills mere hours. Reading the SEC’s 600-page market data infrastructure proposal, on the other hand, can fill days or even weeks! Who needs the tawdry flash of Joe Exotic when we have the intricate plot twists of Release №34–88216 to entertain us? [Disclosure: obviously I also did watch the Tiger King thing.]

The mysteries of Release №34–88216 are hard to oversell. Why did it come out so soon after Release №34–87906, which it appears to be in conflict with? What strange bedfellows are responsible for its unstable mix of grandiose vision and baffling compromises? And why is so much of the content banished to footnotes?

These curiosities and many more compelled me to imagine the kind of process that could have led to the production of this beguiling document. My leading theory is that this is the culmination of a soon-to-be-released reality TV show — Survivor: SEC. But who wants to wait? Let’s binge it now!

Episode One: The Odd Lot Out

Our contestants arrive at their secluded destination: an exotic desert conference room equipped with bottled water, instant coffee packets, and a single whiteboard marker that they each eye territorially. They are a scrappy, veteran bunch. There is a seasoned trader, quietly taking stock of the others. Despite the warm season, he is wearing a Patagonia vest. There is an exchange representative, deftly annexing the instant coffee packets and assuring he will dole them out generously to the others as a service. There is a software engineer, keeping to herself. She sits closest to the whiteboard, which she finds surprisingly comforting in this unfamiliar environment.

The SEC host enters the room as an expectant silence descends. A young intern who had been sleeping in a corner snaps to attention. He grips his clipboard so forcefully that his knuckles turn white.

The host holds up two identical red balls. “These,” she says “are round lots.” She tosses one in the air and catches it. “They are well-behaved. They are interchangeable.” She juggles the two balls seamlessly in one hand. She motions to the intern, who drops his clipboard and hurriedly fishes in his pocket. The intern pulls out a smaller, somewhat misshapen green cube. He tosses it to the host. The host catches it, but drops the red balls in the process.

She holds the green cube up for the contestants to see. “This,” she says slowly, focusing on the object in her hand with a hostile intensity, “is an odd lot. It is not well-behaved. It is not interchangeable. It causes problems.”

She drops the cube to the floor in disgust. “Today’s challenge,” she says, “is to formulate a proposal for adding some information about odd lot quotes to the SIPs.” She grabs the whiteboard marker. “The goal is to separate useful information” — she pauses to write USEFUL INFORMATION on the board — “from unnecessary clutter” — she writes UNNECESSARY CLUTTER below and draws a thick horizontal line to separate the phrases.

The engineer raises her hand. “But why can’t we just include all top-of-book odd lot quotes in the SIP?” She asks. “I mean, we could still give the same top-of-book info about round lots that exists today, but just add information about the best odd lot quotes too. Isn’t that an option? Wasn’t that a proposal that was put out in 2019?”

The host shakes her head disapprovingly. She taps the marker against UNNECCESSARY CLUTTER.

“I’ve got an idea,” the exchange rep interjects. “What if we redefine ‘round’. We make the rules anyway. We can just say the things we want are round lots, and the things we don’t are not.”

“Oh, I like that,” the host says. “Write that down,” she tells the intern. “Maybe we’ll use it in a footnote.”

“But I want all the things,” the trader complains. “I just want to know all the odd lots. Why not?”

The host shakes her head again. “You can’t handle all the odd lots.”

“But I already get them from the direct …”

“Too many messages. It would make the feed too complex.” She raps the marker against UNNECESSARY CLUTTER again. “But let’s explore this redefining ‘round’ idea. We wouldn’t even have to rewrite that many of the rules, since ‘round lot’ appears everywhere. It could be super simple! We could just say: ‘Accordingly, under proposed Rule 600(b)(81) of Regulation NMS, a “round lot” would be defined as: (1) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $50.00 or less per share, an order for the purchase or sale of an NMS stock of 100 shares; (2) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $50.01 to $100.00 per share, an order for the purchase or sale of an NMS stock of 20 shares; (3) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $100.01 to $500.00 per share, an order for the purchase or sale of an NMS stock of 10 shares; (4) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $500.01 to $1,000.00 per share, an order for the purchase or sale of an NMS stock of 2 shares; and (5) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $1,000.01 or more per share, an order for the purchase or sale of an NMS stock of 1 share.’ [p. 65 of №34–88216] Oh, but we’d still use the 100 share rule for protected quotes of course.” [p. 92 of №34–88216]

She pauses. “Did you get that?” she asks the intern, who is writing furiously. He nods unconvincingly.

At this point the engineer has her head in her hands. She sighs deeply. Then she goes to the whiteboard and firmly erases USEFUL INFORMATION and UNNECESSARY CLUTTER. “That’s supposed to be simple??!” she scolds. “Nevermind the little mistakes, like that an ‘average’ price could be say $50.005, and hence fall between your categories, but the whole premise here is just silly. Complexity doesn’t mean what you think it means.”

She whips her own whiteboard marker out of a hip holster and deftly uncaps it. “There are different kinds of complexity,” she begins. “There’s communication complexity, which concerns the total number and length of messages that need to be sent.” She draws arrows going back and forth between two servers and labels it COMMUNICATION COMPLEXITY. “There’s computational complexity, which concerns the processing that needs to be done.” She draws a rudimentary diagram of a circuit and labels it COMPUTATIONAL COMPLEXITY. “And then there’s a fuzzier concept of complexity which concerns how easy it is for a human to mess something up.” She draws a confused stick figure and labels it HUMAN COMPLEXITY. “We can’t minimize all of these kinds of complexity at the same time. So how do we know what to focus on? Well, we should identify what is our most limited resource. The options are things like: COMMUNICATION BANDWIDTH, COMPUTER MEMORY, COMPUTER PROCESSING TIME, HUMAN ENGINEERING TIME.”

The host at this point is frowning.

“I suppose I could add HUMAN LEGAL TIME,” the engineer concedes, “for the trouble it would take to rewrite all the rules differently, but this is a one-time cost, so is not likely to compare to the other costs which will be incurred perpetually by market participants.” She crosses HUMAN LEGAL TIME off the list.

“Now including top-of-book odd lots universally will cause more messages than your butchered ‘round lot’ definition,” the engineer says. “But someone processing the feed in real time could quickly filter out any unwanted messages, so the number of messages is not really a great target to minimize. And the same holds for longer term storage: anyone could choose to store only whatever subset of messages they care about. And if we think about processing time, sure, there might be a small win from not having to process those extra messages, but there is also a processing burden incurred on senders to perform a more complicated check to decide if an odd lot quote needs to be reported to the SIP. And there will be considerable cost to computer processing time and human engineering time for users of the data to adjust for the now changing unit of a ‘round lot’ in any analyses they do. This introduces myriad opportunities for human error, both in coding and interpretation. If a historical study covers several months of data, and talks about some average property of ‘round lots’ over this time, what will this really mean? How should we adjust for the discontinuities in the data that will occur around each month’s boundary? We’d be taking clean data and distorting it for no good reason.” She sketches a curve with jagged jumps at regular intervals, with an angry face drawn above each jump.

“Look, I do get the temptation. Complexity tradeoffs are a kind of whack-a-mole game — what we push down in the number of messages pops up in the computational processing. And who’s to say which way is better? But there is one place we know not to hide our dirty complexity laundry, and that’s in fundamental units. Shifting units are the bane of any engineer’s existence. NASA lost a Mars orbiter because of confusion on units!” She writes CONFUSING UNITS and draws a mushroom cloud above it.

“Besides, there are many more messages in the direct feeds, and people seem fully capable of handling them.” And with that, the engineer sits down. There is a moment of awkward silence.

The exchange representative points to the engineer. “I vote her out,” he says.

“Me too,” says the trader.

“Done!” claps the host. The engineer sighs. On her way out, she picks up the extra whiteboard marker that the host set down on the table. “You don’t deserve this,” she says, to no one in particular.

Episode Two: The Surprise Guest Star

The next day begins with the exchange rep and the trader alone in the conference room. The vibe is mutual suspicion.

“Can I have some instant coffee?” the trader asks.

The exchange rep gives him a packet. “That will be $10,” he says. It’s not clear if it’s a joke.

At this moment, a mysterious woman enters the conference room. She is wearing an extraordinarily well-tailored business suit and fashionable shoes. She sits down without acknowledging the men.

“Want some instant coffee?” the exchange rep asks. She wrinkles her nose.

The host enters, the intern closely in tow. “Ah, good! I see you’ve already met our surprise celebrity guest star. Please welcome the competing consolidator!”

The other contestants look confused.

“I guess I should explain,” the host continues. “She’s not a celebrity yet. She’s more of a stand-in for a future cast of multiple celebrities. See, we’re not going to have single SIP processors anymore. We’re going to have a thriving ecosystem of competing consolidators. And they will be soo cool!”

The competing consolidator nods stiffly. The intern takes down every word. He underlines “soo cool.”

“Today’s challenge,” the host says, “is a race.”

The trader looks at the exchange rep’s lazy posture and the competing consolidator’s uncomfortable shoes. He likes his chances.

“Of course you won’t be racing,” the host says to the exchange rep. The trader frowns. “You’ll be making up the rules of the race.”

The exchange rep smiles.

“And you won’t be racing either,” the host says to the competing consolidator. “Your job is to help the trader race.”

“Then who will I be racing?” the trader asks.

“Yourself,” the host says.

We cut to the trader standing on a precariously high platform, clutching the handlebar of a zipline. He is wearing a sleek, aerodynamic hat that says MARKET MAKER.

“You start here,” the host explains, shouting to be heard over the wind. “You go down the zipline, you run straight across that field, then you have to get up and over that wall at the other side. We’ll be timing you from start to finish.”

“Would you like to buy a ladder?” the exchange rep asks. “If you buy a ladder it’ll be there to help you over the wall.”

The trader looks at the host. The host shrugs. “Up to you.”

“Sure,” the trader says. “I’ll buy the ladder.”

“That’ll be $10,000,” the exchange rep declares.

The trader glares at him.

“Fine, I’ll give you a $5,000 rebate,” the exchange rep relents.

The trader takes off down the zipline. He hits the field running. His sprinting form is magnificent. In the view from the platform, he is but a darting blur of gelled hair and Patagonia. He reaches the wall, where the intern has dutifully set out the ladder. The trader climbs it swiftly, leaps over the wall, and lands on the other side, poised like a leopard ready to pounce.

The intern inspects his stopwatch and writes down the time.

We cut to the trader standing on a new, still precariously high platform, again clutching the handlebar of a zipline. Now he is wearing a bulky, ill-fitting hat that says AGENCY. “This time,” the host yells, “You’ll go down the zipline. You’ll run through that field, zig-zagging through orange cones in the “risk check” zone, and you’ll once again have to get over the wall. And you have to keep your hat on. Oh, and you won’t get to choose when you leave the platform, I’ll just push you.”

“Whatever,” the trader says. He looks at the competing consolidator. “And what exactly did you do to help?”

“I made sure this zip line is as fast as the other one,” she says, pleased with herself.

“Would you like to buy a ladder?” the exchange rep asks.

“Just bill me,” the trader yells, as the host pushes him off the platform. “That’ll be $10,000!” the exchange rep yells after him. The trader hits the field running. He furiously zig-zags through the cones, holding his hat on his head with one hand. He reaches the wall where the intern has again dutifully perched the ladder. He climbs it swiftly and lands on the other side, poised like a panther ready to pounce.

The intern inspects his stopwatch and writes down the time. The intern shakes his head disapprovingly. “200 microseconds slower than last time,” he says.

Back in the conference room, the trader is catching his breath. The exchange rep is busy drawing up designs for a new, super-premium ladder, and the competing consolidator is looking forlornly at her now bare feet.

“What happened to your shoes?” the trader asks.

“Lost them while testing those zip lines,” she says. “I did work hard for you, you know? I made sure that second zipline was as fast the first one. It was all they allowed me to do, so I did it thoroughly.”

The trader is a little surprised. “Thanks,” he says. “Really.” She nods.

The host enters the room, intern in tow. They are shaking their heads in unison. “These results are not good,” the host says. “The second run was slower than the first.”

“It’s not my fault,” the trader says. “I really tried my hardest both times.” And strangely, he realizes, he did.

“It’s not my fault,” the exchange rep says. “You approved my rules as being reasonable and not unfairly discriminatory.”

“The zip lines were the same,” the competing consolidator mutters. “They were the same, they were the same, they were the same…” she holds herself as if suddenly chilled. She knows what’s coming.

“We have no more use for you,” the host tells her, firmly gesturing to the door. The intern copies the gesture.

The competing consolidator begins to exit slowly, broken and bare-footed.

“Don’t worry,” the host consoles her. “We’ll still renew your contract for next season. Celebrity guest stars are always a welcome distraction, even if they do nothing to advance the plot.”

She sighs in relief.

Episode Three: The Exchange of Ideas

The next day begins with the trader and the exchange rep alone in the conference room. The trader is wary, on edge. He doesn’t ask for coffee. The exchange rep is lounging comfortably, his shoes on the table.

The host enters, the intern nipping at her heels. She pulls up a chair in the front of the conference room and begins spinning around in it. After a few spins, she steadies herself by grabbing the table. She plops her elbows down on the table, and her props up her face in her palms.

“So gentlemen, the challenge today is simple. This buzzer…” she gestures to the empty table in front of her. She pauses, pointedly. The intern sputters into action, pulling a dramatic red buzzer from his bag and placing it in front of her.

“This buzzer,” she gestures again, “will decide your fate.”

The intern has shuffled back to his seat, his clipboard at the ready.

“All you have to do,” she says, “is sell me.”

“Sell you what?” the trader asks skeptically.

“Anything you like!” she says. “As long as it’s bullshit. Sell me on a line of bullshit that sounds convincing, but only under the most superficial scrutiny. And really sell it. Make me believe that you believe I could believe it.”

She points to the exchange rep. “You first.”

The exchange rep smiles. “The direct feeds are faster than the current SIP feeds, everyone admits this,” he says. Everyone nods along, mesmerized. The intern is taking it down verbatim. “Also, we cannot afford to add depth of book data to the SIP feeds, because that will slow them down.” Everyone nods again.

“Wait, where’s the bull… oh good one, you got me!” the host delights. “Took me a second there, but I got it. The direct feeds have depth of book AND they’re faster, so there’s no real reason why depth of book can’t be fast! Oooo, really good one!”

The exchange rep winks at her. She turns to the trader. “You next.”

The trader gathers his thoughts. “I can operate my own dark pool, and still look out for the best interests of my agency clients,” he says. He says it like a mantra. He says it like he says it in the mirror every morning.

“Excellent!” the host squeals. “Beautifully delivered.” She turns back to the exchange rep. “You go again!”

The exchange rep adjusts his shoulders. He theatrically clears his throat. “Auction data cannot be added to the SIP,” he declares, “because the crossing process is our intellectual property, retail investors do not use the imbalance information, and auction data is already widely available to retail investors and retail online brokers.” [p. 128 of №34–88216]

The exchange rep sits back, satisfied with himself. The host has a frozen expression. Suddenly she begins to frown.

“So let me get this straight,” she says angrily. “You expect me to believe that auction data is top secret, not useful, and widely available already?”

The exchange rep is taken aback. “Um… yeah?” he says.

She hits the buzzer. Loud noises and flashing lights engulf the conference room. The intern covers his ears.

“Out!” the host bellows, and the exchange rep leaves sheepishly.

Episode Four: The Prize

As the loud noises subside and the flashing lights stop, the trader sits stoically. The host eyes him disappointedly. “I guess you win,” she says.

“What do I win exactly?”

“You win the right to define the mission for this whole thing.” She gestures broadly with both arms. “Why are we here, what do we want to accomplish. Think of this like a genie — you get one wish. One wish for what you want from a SIP. Think carefully before you answer.”

The intern sits on the edge of his chair in anticipation, his pen poised above his clipboard.

The trader ponders. In his youthful days, he may have dreamed of a radical SIP that would usher in a new era for markets. He might have believed in the fundamental fairness of markets. He might have offered a bold vision — defined a truly capitalist Eden that would have beckoned to enterprising souls with a clarion call.

But now he is a jaded, tired man. He puts no stock in grandiose visions. He looks down at his feet. He wrings his hands.

“I guess I would like depth of book data to be slightly cheaper than it is now,” he says.

The intern writes: SLIGHTLY CHEAPER THAN MONOPOLY PRICING?

“That sounds reasonable and not unfairly discriminatory,” the host says, pleased. “Let’s wrap it up then, we can all go home. Intern, did you get all that down?”

The intern nods. “Okay, write it all up. Put most of it in footnotes. Copy and paste some stuff if you want, no one will read the whole thing. And be sure to pose an unconscionable number of questions to commentators. Like 297 of them.”

The intern nods.