In business, competitive markets are generally considered desirable. But in the case of a consolidated tape in Europe, many market participants favor a single provider over multiple consolidated tape providers (CTPs).

“Normally we are quite prompt to say competition will help the market be more effective, but in this case, the consolidated tape by design is more suited to a central provider where you see all the data at a very low cost. So, competition, in this case, may not be the right answer,” says one head of market structure at a European investment bank.

Over the next few months, the European Commission (EC) will publish legislative proposals as part of its review of the Market in Financial Instruments Directive (Mifid II) and the Markets in Financial Instruments Regulation (Mifir) that will map out the new framework for the tape, including offering commercial incentives for potential CT providers to come forward, and addressing issues with data standards. The earliest proposals on the CT are currently expected on November 23.

In a summary report published on October 20 on the Mifid II/Mifir consultation, the EC said that a CTP has failed to emerge due to a lack of financial incentives, insufficient data quality for over-the-counter and Systematic Internalizers (SIs) transactions, competition from data vendors, and a restrictive regulatory environment.

As part of the upcoming proposals, the EU authorities are considering permitting a competitive market that would allow for multiple providers to vie for market share. Lawmakers have discussed the potential of having multiple CTPs in recent online events and webinars.

The Federation of European Securities Exchanges hosted one such virtual event on October 7, where 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.

While the capital markets wait to see how the EC proposals shake out, several sources spoken to by WatersTechnology for this article are concerned that a competitive CT model could 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.

The first issue is that there’s a limited revenue pool up for grabs. Nicholas Bean, global head of multi-asset electronic trading at Bloomberg, says that a single CTP determined via a competitive tender has a higher likelihood of commercial viability than several CTPs vying for the same customers. For instance, one CTP has the potential to benefit from 100% of the market share, whereas multiple CTPs would compete for a fraction of modest profit margins, he says.

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, says 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,” Carter says.

But, she adds, you don’t have to look too far to see a successful example of a single CT provider for the bond markets. In the US, the Trade Reporting and Compliance Engine (Trace), operated by the Financial Industry Regulation Authority, requires brokers to report their trades to the Securities and Exchange Commission according to rules set out by the regulator. By design, a single operator model like Trace helps combat issues around data fragmentation and standards by harmonizing the data under one provider, Carter says. 

Both Bloomberg and Tradeweb operate Approved Publication Arrangements (APAs), which are mandated under Mifid II to supply the nominated CTP or CTPs with trade data. This trade data is composed of information such as price, volume, a security’s international securities identification number (Isin), and the venue where it traded.

There are currently no data standards for how trade data must be reported to APAs. However, the EC is currently consulting, with a review of regulatory technical standards, on how to address these issues related to the quality of OTC data and how trade data should be reported to APAs. The consultation sets out to help create data standards for the formation of a CT for equity and non-equity instruments.

The core ambition of the CT in Europe is to lower the cost of market data for industry consumers. Pauli Mortensen, head of rates trading at Norges Bank Investment Management, says he is not convinced that a multiple CTP environment is the right model to deliver this 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.”

Mortensen has worked in fixed income for almost 30 years—20 of those at Norges Bank, which he joined in 2001 after almost a decade at Nordea, where he was chief proprietary trader. He says that while private companies are better equipped to offer sophisticated data products, such as value-add analytics, the CT should only include raw transaction data, and should be managed and operated by European regulators. That way, he adds, pan-European regulator the European Securities and Markets Authority (Esma) or national competent authorities could also ensure that the price of the tape remains low.

“I think the consolidated tape is a utility. It’s for the common good. Ideally, it should be provided by the regulator,” he says. “They are gathering all this data and they should be able to present it in a uniform structure to the market.”

However, Mortensen doubts that regulators share his preference of having a utility CT and would choose to become the operators of the tape.

“For different reasons, I don’t think the regulators are interested in doing this job. Maybe they think they don’t have the competence to run it efficiently,” he adds.

Déjà vu

In fixed income markets, APAs are responsible for publishing trade reports on behalf of investment firms and are required to make this information publicly available, free of charge, 15 minutes after publication. MarketAxess, Bloomberg, and Tradeweb run APAs and represent most of the fixed income pricing data universe for electronic trading, but no single APA has full visibility of the market.

Christoph Hock, head of multi-asset trading at Frankfurt-based Union Investment, the investment management arm of Germany’s DZ Bank, says some of the larger APAs might have coverage of 50% to 70% of the market, but that investment firms wanting to obtain a full picture of the market and access near-real-time pricing must subscribe to multiple APAs.

To qualify as a consolidated tape in fixed income, the provider must cover at least 80% of the market. Many asset managers are concerned that having multiple CTPs with only partial visibility of the market could give rise to the same issues that exist with data fragmentation today. The consequence, Hock says, would be that investment firms will have to pay to connect to multiple CTPs in a competitive market, as opposed to a single provider.

“What we clearly do not want is what we have with the APAs, where CTP number one has the trades from A to K, then the next CTP has the following trades that are not covered by the first CTP,” he says.

APAs could also face higher costs under a competitive model. While competition traditionally drives down costs, Hock says that if there are multiple CTPs, APAs would likely have to manage the various connections, data standards, and logic associated with each CT.

This is a technical cost that could be passed down to the provider of the tape or even investment firms that use the APA services, says the market structure head at the European bank.

“You have connectivity costs, which would be quite expensive on the APAs. And as an APA member, as a bank, we might see costs going up because our APAs might say, ‘Sorry, but now we have to manage [and standardize] this data 20 times,’” Hock says.

Similarly, the European bank source, which also runs a systematic internalizer and is required to publicly report trade data, might also incur additional costs if it is made to manage connections to multiple CTPs.

Those contributing and consuming the data for investment purposes are not the only ones that could be confronted with higher costs. EU regulators would be kept busier supervising several CTPs compared to a single provider—a challenge that industry firms have communicated to authorities, the market structure head says.

The money maker

However, not everyone is ruling out competition in the EU CT market. Hock says providers could successfully vie for business by building out more sophisticated, in-depth analytics on top of the tape.

A similar shift is beginning to play out in the US. In December 2020, the SEC finalized a rule that made significant changes to the US equities market structure, opening the door for interested technology vendors to become suppliers of the official tape of consolidated market data for US equities.

The new rules create a system in which, instead of two exchange-run Securities Information Processors pumping out bid/ask quotes consolidated from the US trading venues to consumers, a decentralized system of entities called competing consolidators will perform that role as private businesses, alongside the existing Sips.

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

It is still unclear, at least in terms of its latest position, which asset class or classes the EC will prioritize for the CT.

In December 2019, Esma recommended the development of a real-time equity tape. But in January of this year, the EC communicated to the European Parliament that it was reviewing the design and implementation of a consolidated tape “in particular for corporate bond issuances”.

Speaking at standards body Fix Trading Community’s EMEA Trading Conference on June 23, Tilman Lueder, head of the securities markets at the EC, also said that the Commission will be drafting proposals for a consolidated tape in the coming months, covering “certain strategic asset classes in the derivatives world”, as well as equities, bonds, and exchange-traded funds.

However, some sources anticipate a bond or equities tape to be rolled out first—or perhaps, for both CTs to be implemented in tandem. Whatever form it takes, and whichever asset classes it covers, Lueder said at the Fix conference that a beta version of the tape should be ready for testing in 2023.