As the calendar turns over to 2022, data professionals and regulators in the European Union are hoping are hoping to make progress on the building of a consolidated tape (CT) in the region—though a raft of questions and uncertainty still lingers. Here’s what you need to know as we head into the New Year.

On November 25, Tilman Lueder, head of securities markets at the European Commission (EC), published a 41-page paper on the EC’s proposals for the consolidated tape.

For the most part, the proposed framework directed a new spate of attention on the EU regulator’s long-held ambition to produce a low-cost central database for market data prices, not only for equities but corporate bonds and derivatives. This objective has demanded greater urgency as the EU 27 bloc tries to bolster its position as a financial center and compete with rival markets like the US and, following its departure from the European Union, the UK.

The EC’s CT proposals form one part of the regulator’s review of the second Markets and Financial Instruments Directive and Regulation (Mifid II and Mifir), and it represents a broader ambition to create a single capital market across the region.

However, since Mifid II came into force in 2018, no consolidated tape provider (CTP)—which is backed by the regulator—has emerged and EU lawmakers have pointed to several reasons for this. A report published by the Commission on October 20, said that a CTP had failed to come forward due to a lack of financial incentives, insufficient data quality, competition from data vendors, and a restrictive regulatory environment. Some, if not all of these issues, are hoped to be addressed with the latest package of proposals, and upcoming regulatory reviews in 2022.

Laying the groundwork

It was a long time coming, but on June 25, Lueder announced at the Fix European Trading conference, that in the latter half of 2021 the EC would draft and publish proposals for a consolidated tape in Europe covering “certain strategic asset classes in the derivatives world”—as well as equities, bonds, and exchange-traded funds (ETFs). Adding to the excitement, an EC official said a beta version would be available for testing in 2023 and that industry vendors were in fact working on CT propositions behind the scenes.

“We’re still of the opinion that this can be provided by private initiative,” said the official. “We have had many conversations with very motivated actors who are ready to do this and who have the technological capacity. All they’re basically waiting for is some tweaks to the legislative framework so that they can get going.”

At the event, the regulator made it clear that the work thrown behind the construction of a CT, by default, would also force changes in data quality. For one, it would provide incentives to standardize over-the-counter derivatives data, such as rectifying issues associated with the international securities identification numbers (Isins), a 12-digit alphanumeric code used to identify securities.

The hope, Lueder said, was that the tape initiative could provide “political impetus” to resolving problems with the Isin, as the standard fails to differentiate an instrument according to maturities.  

One purpose of the proposed CT framework was to improve data quality by also harmonizing data reporting and mandatory contribution. From there, the regulator said “private enterprises can then decide what they wish to offer” in terms of a CT proposition.

New players

In July, WatersTechnology reported how new market data vendors started to emerge. Out of them included Glimpse Markets, a network of buy-side institutions pooling bond trading data, and Ediphy, a provider of aggregated data for the corporate bond markets.

Paul O’Brien founded Glimpse in the summer of 2020, not with the intention of becoming the regulatory-backed CT, but because of the lack of progress towards transparency in the bond markets and the high cost of market data.

Glimpse is trying to form a network of buy-side members that will share their data and get paid for it. The data service collects corporate bond and emerging markets data from these firms, including trades that are processed or portfolio trades that are executed on- or off-venue. 

“The buy side typically collects this information in their order-execution management systems which are fed by the main trading platforms,” O’Brien said. “We only pool data that the buy side is entitled to re-distribute so no special permission or licenses are required.”   

Taking a somewhat different approach, Chris Murphy, CEO, and co-founder of Ediphy Analytics, a division of Ediphy Markets, said his company started consolidating data for its own internal purposes a few years ago, and had not originally intended to become a CTP.

“But as we have shown more people what we have been doing with the data and our capabilities, the more they said, ‘Why wouldn’t you come forward as a CTP?’ We looked at the commercial side of things and thought that under the current rules, we can’t find anything that works. But this initiative is something that we can get to work on in the intervening period before the commercial rules change,” Murphy said.

One versus many?

In the run-up to the EC’s proposals, a main point of discussion was whether there should be a single provider of the CT, or multiple. One lawmaker aired their preference of the latter option during a virtual event hosted by the Federation of European Securities Exchanges on October 7.

John Berrigan, director-general of the financial stability, financial services, and capital markets union at the EC, said he would champion a competitive CT model.

“I ideally favor competition in these markets, so I would like to think that this is another market where we can have competition. I’m not at all sure that a single provider is the first best option, but let’s see what we can deliver,” he said.

Several sources, however, told WatersTechnology in October, that they were concerned that a competitive CT model would create new deterrents to providers coming forward, creating high overheads and lower revenue opportunities for businesses that would be required to offer data at low cost. Some cited concerns that there would be a limited revenue pool up for grabs. From this perspective, a single provider would make more sense from a revenue perspective, rather than multiple vendors chasing after the same customers.

The second issue is the costs that would be inherent in building systems to capture that revenue.

Liz Carter, managing director of trade reporting and clearing at Tradeweb, said a competitive CT environment could discourage candidates from coming forward to become a CTP if the costs—such as developing the CT, building the connectivity, and managing the data—outweigh the returns.

“A multiple-CTP-per-asset class model could potentially have the adverse effect of de-incentivizing potential providers to step up due to increased uncertainty and risk around operational cost recovery,” she said.

The core ambition of the CT in Europe is to lower the cost of market data for industry consumers. Back in October, Pauli Mortensen, head of rates trading at Norges Bank Investment Management, said he wasn’t convinced that a multiple CTP environment was the right model to deliver the objective.

“I don’t think it makes much sense because, for me, a consolidated tape is a natural monopoly. They provide a few sets of data per transaction, done in the market: it is the Isin of the bond, the price, the timestamp, and the volume. It’s very low-key, simple data. And if you have several tapes out there, they will basically offer the same product.”

However, not everyone was ruling out competition in the CT market completely.

Christoph Hock, head of multi-asset trading at Frankfurt-based Union Investment, the investment management arm of Germany’s DZ Bank, said data providers could successfully vie for business by building out more sophisticated, in-depth analytics on top of the tape.

Hock compares this to what’s taking place across the Atlantic with the US exchange-run Securities Information Processors, where the SEC made rule changes that will open the door for interested technology vendors to become suppliers of the official tape of consolidated market data for US equities and compete for market share.

“In the States, that’s where competition is kicking in,” Hock said. “You won’t really make decent money by collecting and selling raw data to interested counterparties. A consolidated tape must be run as a low cost-utility. The more profitable part will be adding analytics around a CT.”

Patchy data

Back in November, several CT candidates publicly communicated their interest in becoming the consolidated tape provider: Finbourne, Ediphy and Propellant. Others—including Etrading Software—were known to also be considering coming forward.

Candidates building tapes had already run into problems around data quality. A lack of standards and gaps in reported data was and still is impeding efforts to develop workable prototypes for a consolidated tape.

“You can have the best piece of kit in the world, but if you’re looking to put unrefined petrol into a Formula 1 car, it’s just not going to work. If the right information is not put in the right way, then it must be cleaned up,” said Neil Ryan, a consultant at Finbourne, a UK-based tech company.

Behind the scenes, WatersTechnology spoke to several sources and learned that some firms were also wary of publicly entering the race until they knew whether lawmakers at the European Commission would offer commercial incentives to become the EU CTP and address the lack of standards in reported data.

“Everyone is waiting for the Commission to lay down the ground rules,” said Sassan Danesh, managing partner at Etrading Software. “Could there be bigger names, or could there be other small specialist vendors that want to be involved? Yes, quite likely. Could Etrading Software be interested? Quite likely.”

Norges Bank’s Mortensen said that it would be challenging to build a consolidated tape under the current legislative framework due to the cost it would take to clean and aggregate the unstandardized data, while also ensuring it covered a high enough percentage of the market to make it valuable for users to purchase the data. For instance, regulators will only approve a fixed income or derivatives consolidated tape if it covers 80% of the market.

At the root of these issues, Mortensen said, is the lack of standards in the reported data via approved publication arrangements (APAs) and trading venues. APAs are responsible for publishing trade reports on behalf of investment firms, and they are required to make this information publicly available, free of charge, 15 minutes after publication. But they are not mandated to publish reports in a specific format.

Today, APAs make the trade information publicly available as a CSV file or in JavaScript Object Notation (Json). The challenge is to configure the different formats and data fields into a single consolidated view.

“The venues have made the data publicly available as required. They haven’t necessarily made it easy, but they’ve made it publicly available if you know what to do with it,” Finbourne’s Ryan said.

An additional problem stems from the deferral regime in Europe. Under EU rules, investment firms trading non-equity instruments can choose to defer the publication of their post-trade data for several weeks under certain scenarios, for example, in large-scale trades or in instances of an illiquid market. This leads to gaps in the reported data.

Susan Yavari, regulatory policy advisor at the European Fund and Asset Management Association, said: “By the time it is published, it’s stale data. It’s nothing that the market is particularly interested in because they can’t react to it or it doesn’t enhance their understanding—certainly, as a buy-side firm—of the liquidity in the market.”

Interesting partners

Towards the end of the year, rumors began to circulate that three major rival operators in fixed income trading—Bloomberg, MarketAxess, and Tradeweb—were planning to deliver a regulated consolidated tape for bonds in the European Union.

All three companies had repeatedly declined to confirm the plans, but 6 out of the 17 sources WatersTechnology had spoken to for the article said they were aware of the joint venture and that the project is on hold pending the outcome of the CT proposals. While regulatory proposals have since been published (on November 25) there is still some way to go before they are drafted into law—in the EU it will require a period of consultation and will need to be passed by the EU Parliament.  

A senior executive at one of the three venues said that APA operators have an advantage over other vendors hoping to become a regulated CTP.

“The candidates who already have existing experience in operating APAs, in my opinion, would have much higher confidence in terms of their delivery of a CTP than those candidates who have not delivered or don’t operate an APA. The reason for that is quite simple: the technical difference between an APA and a CTP is marginal,” the source said.

Data published by the European Securities and Markets Authority showed that, in 2019, Bloomberg, MarketAxess, and Tradeweb accounted for 84% of the fixed income volume traded on multilateral trading facilities (MTFs) in the European Economic Area (EEA), which amounts to €12.6 trillion ($14.2 trillion).

Some sources are worried about how the joint venture could be governed or how it might further entrench the operator’s dominance in the FI market.

One head of trading at an EU-based asset manager said the firm’s data costs, including associated connectivity costs, are “fairly high,” which is “related to the fact that you have three [MTFs] with a 90% market share, and not five or 10 MTFs like you have in the equities space.”

They continued: “The fact that in fixed income you have this oligopoly has unintended consequences on certain pricing factors. And that’s why, if these guys set up a CT provider, it definitely has to be governed as its own individual company and not part of each firm. It has to be clearly separate from the operative MTF business,” the source said.

A second head of fixed-income trading at a Europe-based investment bank said that for the joint CT to work, the venues should not use the data to create “a profit-making machine.”

“The APAs are in the best position to produce the tape. I would not have any objections to them doing it as long they understand it is going to be a utility for the common good, and the pricing of receiving data from a tape should be in line with the cost—there should be no added cost on top of that.”

So, what’s next?

While the EC’s published proposals attempted to offer some clarity on how the CT model would operate, there is still a long way to go before a tape provider materializes. The published framework did shed some light on core issues, like the mandatory provision of market data from venues to the CTP; how data quality will be governed; and it had some limited detail about how the CT revenue can be distributed and lists the criteria for the CTP selection process. But there are still many questions that are left unanswered going into the New Year.

A big one is, could mandatory consumption become a requirement? This would mean users of the CT would be obligated to consume the data as a way of ensuring its viability and profitability for a commercial provider.

During the virtual event, Trading and Best Execution Summit, Europe, on November 18, Lueder of the EC said that the main subjects of debate around the creation of a consolidated tape are no longer fixed on whether the technology can be built because it can be. It’s no longer about whether this data can be improved, because it can. And it’s no longer a question of whether a CT would prove beneficial to market participants, because it will, he contended.

Yet, the most challenging part of making the CT a reality is figuring out how the economics of the tape should play out. The idea of democratizing access to market data directly clashes with how data vendors run their businesses today. The difficulty is creating a framework in which a cheaper market data service and other data business models can co-exist.

“We have a [market] structure where the data needs to be harmonized, the data needs to be normalized and there needs to be reporting standards for core market data; there have to be mandatory contributions, and then there has to be fair compensation. And out of those three, you can guess the last one is the most difficult one. That’s the socio-economic part. That’s where the whole success of this thing will be designed,” Lueder said.

For a CT to come to fruition, concessions will have to be made. Where those concessions are made and by how much, will be a major topic for 2022 and one to watch out for.

Or, in Lueder’s words: “Something will have to give at some stage.”