Consolidated Tape Headed for a Regulation Delegation

Time is running out for an industry-led consolidated tape solution in Europe.

The revised Markets in Financial Instruments Directive (Mifid II) introduces the concept of a consolidated tape provider (CTP). According to Article 65, a CTP collects post-trade data published by trading venues and approved publication arrangements (APAs) and will consolidate them into a continuous live data stream and make the data available to the public, both for equity and non-equity products.

The European Securities and Markets Authority (Esma) allows for up to two years following the Jan. 3, 2018, implementation of Mifid II for a CTP to step forward. If there are no takers, Esma is charged with reviewing the situation, and an Esma spokesperson confirms a review is scheduled for 2019, “but right now it is too early to be more specific on exact timing.” If necessary, the regulator is empowered by Mifid II to mandate the establishment of one or more CTPs, but Esma declined to comment on whether that is an area currently under discussion.

“Delegated acts are on the horizon,” says Graham Dick, head of client relationship management as Aquis Exchange, adding that ultimately, the CTP is going to an Esma directive with input from various national competent authorities (NCAs). “Esma will put something else out to tender, and once something goes out to tender, [the regulators] impose the conditions on which the consolidated tape is drawn up and done, rather than it being proposed by the industry.”

Dick has a gimlet understanding of the difficulties inherent in establishing an industry-led CTP, because about five years ago, he was part of a partnership that spent a year and a half trying to create a consolidated tape business for pan-European equities.

“We gathered all of the vendors, all of the various providers of pan-European market data, the main incumbent exchanges, the main clients, and we spoke to a lot of the buy-side institutions to try and gather an industry consensus and that had quite a lot of momentum in the early stages,” he says. Although it ultimately did not work out, Dick says it is very clear that in order to have an “effective and efficient” consolidated tape, every participant has to be gathered and working together. “If one person gets away and doesn’t want to participate, then your tape is less valuable. What happened is that we’d gathered quite a large number of providers but we hadn’t gathered them all, and then some of the others started to flake away, and that’s why it didn’t work at the time.”

The US Security and Exchange Commission (SEC) established a consolidated tape in 1976, which reports price and volume data on exchange-listed stocks and could serve as a preview of what is to come in Europe. “When we see other markets which have got a consolidated tape, like the US, it’s nice to think we might be able to achieve something like that,” says the head trader at a UK-based asset manager, who was quick to follow up that there are regulatory downsides to an electronic tape, such as the trade-through rule in the US, which requires orders to be executed at the lowest price on any market. “Sometimes the best price is not actually the best execution,” the head trader says.

Data Matters

Certainly, the European market has done without a CTP for years, and so an argument could be made that the lack of a consolidated tape isn’t really that big of a deal.

“If everyone is challenged, is anyone missing out?” asks Matthew Coupe, director of market structure at Barclays and co-chair of the EMEA regional committee and EMEA regulatory subcommittee for the FIX Trading Community.

The answer is unclear, and likely to change as the market evolves.

While the data may not be strictly necessary, it certainly could prove useful. The asset manager says if he could see what everyone else is doing in real time, he could determine “whether I’m a good trader or a bad trader because I’d be comparing my performance against a truer benchmark.”

“Mifid is about making sure the end investor has a stable and transparent market to invest in, so we can actually get the right growth of assets. From a buy-side point of view, they want to be able to see and leverage that data,” Coupe says.

Perhaps the most valuable benefit of a CTP would be the potential for improved data quality.

One fintech consultant says APAs have an obligation to check the data and reject it if they find it is low-quality, but “I don’t think they’re doing an awful lot of that at the moment.” He reports that data quality expectations were high for 2018, but when he looks at the raw data currently available, he spots multiple errors. He blames a current “regulatory imbalance” where regulators are tough on some APAs and trading venues but lenient on others. “I think that some of this is so bad that we’re just stepping back to the world before Mifid,” he says, adding that concern over data quality is high enough that end users are less willing to pay for the data.

Coupe says there are data quality issues, namely in post-trade data for the equities market and specifically when it comes to the identification of instruments within over-the-counter (OTC) derivatives. When looking at his organization’s internal data, he adds, the key element is that it can’t be materially misleading, and the APAs should be doing the same assessments.

“As this data is public, they should be making sure that the quality of the data they’re delivering is accurate and provides a good understanding of what is actually happening, and that they are identifying and flagging trades the right way,” Coupe says.

The asset manager’s quality concerns are focused on post-trade transparency. He says different data providers sometimes provide different volume-weighed opening price (VWOP) numbers, which may differ still from the number given by the third party providing his firm’s transaction cost analysis (TCA). “It would be really useful to have a consistent number rather than everyone calculating things slightly differently,” he says.

Coupe says FIX is setting up a committee to try to deliver technical standards that may solve some data inconsistency issues and smooth the path to a CTP.

“Hopefully after a bit of time we can get everyone writing to a single technology specification,” he says. “What you find at the moment is one APA may have a different specification than another, generally because of the rapid nature of how things need to be delivered.”

Coupe says there is no real market advantage to not having a technical specification or not enabling standardization of the data.

Money Pressure

Of course, it is impossible in the current industry landscape to talk about data without having a conversation about costs.

There is an optimistic view of a CTP, that the consolidated data feed could mean lower data costs for firms, by driving down market data prices or allowing them to cut back on outsourced services.

The pendulum swings both ways, however, and data costs are also seen as a major barrier to the establishment of a CTP.

“You’re not just consolidating data, but you’re consolidating costs as well,” says, Alex Wolcough, director of Appsbroker Fintech, whose team is “trying to aggregate as many different sources as possible for non-equity data to provide access to that market data in consolidated tape format.” Like Dick, Wolcough worked on a project to create a consolidated tape several years ago while working for Reuters, which later became Thomson Reuters. He says a CTP would have to get data from all of the different suppliers, and they all want to charge for their product. 

“Getting that data becomes a very costly exercise, plus making sure that it’s stable, reliable, putting all that together,” Coupe says, adding that to be viable, a CTP also needs to ensure that its delivery of the level of access Mifid II requires does not become a burden to users. “With all of these fragmented sources of data, the cost of delivering that and producing it becomes too high.”

The major data providers appear to share the view that becoming a CTP does not make sense for their bottom lines. “We do not currently intend to perform CTP activities, and will therefore not seek to register as a CTP,” a Bloomberg spokesperson says, declining to elaborate.

A Thomson Reuters spokesperson also confirmed that the data giant has opted not to become a consolidated tape provider “at this time.”

“As currently set out, we believe the CTP rules make it difficult for any provider to offer a commercially attractive CTP service that meets the needs of the marketplace,” the Thomson Reuters spokesperson says, citing Mifid II obligations for the CTP to include data from all in-scope venues, including those with minimal liquidity, while the regulation fails to impose a corresponding obligation on the venues themselves.

Dick, however, sees a possible business case for a true CTP, developed as Mifid II intended. “The amount of data is huge, the industry has made progress but there’s still quite a lot of dirty data, which means not everything is fully reflected properly, but it can be done,” he says.

The first step, Dick says, is determining the licensing policies for each individual exchange’s distribution of data. “I know it’s post-trade and I know it can be argued that 15-minute data should be free, but there are entangled distribution licenses and all sorts of historical contracts between regulated exchanges and the big mega-data providers,” he says, adding that once a CTP is mandated, Esma will have to demand that all data is made available to the CTP free of charge. “Then there is a nominal administration fee, which is low enough to be reasonable for everybody, but because it will have so much interest, a whole spectrum of people would be interested in subscribing, and I think you can make it economically viable at a low cost to the industry.”

Coupe says he is concerned about a CTP passing expense along to data consumers.

“If there’s an increased cost of ownership of the data and operating it, there’s going to be an overall increase in the cost of management fees to the end firm, potentially,” he says. “Is that the right outcome for the end investor? Probably not. People want to see this data if it’s material to the instrument.”

“I know Esma wants a consolidated tape,” adds the asset manager. “I don’t know how they would redistribute someone else’s data without paying them for it.”

Divide and Conquer

Breaking down the big project into those smaller market segments would be key, Dick says.

“If they want to address every asset class in Europe, to have some sort of massive consolidated tape, it’s going to take years and years and it’s not going to be functional for a long time,” he says. “I would say the equity market should be a relatively easy segment to start with, and then take the major countries and worry about the marginal 27th or 26th nation that has very little activity, if that’s going to take longer to do. But get the main consolidated tape out, which represents 95 or 98 percent of all flows … because if we start worrying about the marginal stuff around the edges, it’s going to take forever.”

Although he has a relatively optimistic views of the possibilities, Dick says he would have preferred an industry-led initiative.

“My humble opinion is that five years ago, the industry could have put this together and done it themselves. That would have been a consensus view, which would have been a way of taking this forward,” he says. “When anything is driven by a regulator, it’s likely to be clunky, slow, and difficult to use.”

Coupe says he sees a couple of options moving forward. First, the regulators could deliver a CTP themselves, or with a technical partner. Second, Esma could change the regulation “and give the ability for the market data providers to stand up and become CTPs and make it more viable for them to do so. But then you are giving greater control to the market data providers in terms of what feeds they should select and what data they shouldn’t. It’s a huge amount of control.”

However it shakes out, Coupe says it is essential that the industry and regulators communicate while staying focused on Mifid II’s intent to provide transparency to the market as a whole.

“Whether you’re an APA, a market data provider, an investment bank, buy side or sell side, what we all want to see is a clear and accurate representation of what’s happened in the marketplace. As soon as that data paints a different picture, we need to sit down as an industry, work through those challenges, and come to a solution. That also means working with regulators, which are themselves industry members. There are a number of conversations ongoing and that really helps to get a positive result,” he says. “What we need is a consolidated tape that provides an effective result of what the market is trading, to the appropriate levels as described within the regulation, and which gets the data out there in the right way while also not creating too many barriers to entry, commercially. If you create that commercial barrier to entry, you’re cutting out the small guy, who Mifid II is meant to be there for.”

If and when Esma takes the wheel, the industry would certainly give up some control, but that might not be a bad thing. “It’s always best to be self-regulating rather than dictated to, and it would be nice if the data providers could get their act together ahead of that, but they will, I’m sure, fight it because I think it will hurt them financially because they’re able to charge so much,” says the buy-side head of trading, who adds that delegated acts would probably be “a move in the right direction.”