Consolidated tapes gain ground in 2022

That market data costs too much is a perennial complaint of institutional trading organizations. And sometimes, regulators agree with them, particularly when they conclude that costs are being passed on to individual investors.

In recent years, regulators in the US, UK, and EU have considered reforming or introducing consolidated tapes of data. In the US, the Securities Information Processors (Sips) are the pride of the equity markets, vaunted by politicians as one of the reasons these markets are the world’s most efficient. But regulators have been looking to modernize what they see as increasingly outmoded tech, and resolve what they see as conflicts of interest with the large exchanges—the New York Stock Exchange (Nyse), Nasdaq, and Cboe—that sell proprietary data feeds.

The UK and EU have never had a consolidated tape in any asset class, even though the establishment of one (or many) has been encoded in regulation and discussed by lawmakers.

The past year has seen a lot of movement on both sides of the pond toward attaining these respective goals.

The US

The last couple of years have seen the beginning of a quiet revolution in the way equities market data is disseminated to users. In 2021, the Securities and Exchange Commission (SEC) finalized drastic changes, first proposed in early 2020, to how the consolidated tapes of market data from stock exchanges will be operated and governed. This year saw the commission essentially win a series of challenges to its scheme for market data modernization—though there is no clarity yet on when the regulator’s new market data world will emerge from the ashes of the old.

At root, the regulator’s plan was to bring competition to a sector largely made up of Nyse, Nasdaq and Cboe. The SEC saw a conflict of interest in the fact that the exchanges dominate the plans that organize the cheap public feeds but also sell a wider array of data in their proprietary products.

One of the ways they looked at this was to propose a new system whereby a network of 12 or so vendors—called “competing consolidators”—would aggregate an expanded amount of market data and disseminate that to the market, adding their own innovations to the consolidated feeds. Meanwhile, the Sips that currently supply the market with top-of-book data and calculate the national best bid and offer would be gradually retired.

For this system to work, though, the competing consolidators would have to be able to buy raw market data from the exchanges at a low enough cost to make their businesses profitable. The commission compelled the exchanges to put forward a fee filing outlining how much they would charge. Some people hoping to set up consolidator businesses were praying the exchanges would offer the data at cost; others were less optimistic, but hoped at least that the fees would be set at a fixed cost and redistribution fees would be waived just for them.

The fee filing, when it was proposed to the commission and put out for comment, pleased no one. Some said at the time that the filing would even make Sip top-of-book data as expensive as the exchanges’ prop feeds, even though the product was intrinsically less valuable. The filing didn’t even please many exchanges, with smaller ones dissenting from the filing.

The SEC put off its own deadline for approving or disapproving the deadline. It had other problems to deal with: fighting off litigation from the large exchanges. Nyse, Cboe and Nasdaq brought two court cases against the commission, trying to get a District of Columbia court to void the market data schemes.

The exchanges’ arguments hinged mainly on contesting the commission’s authority, particularly with regard to forcing the SROs to give industry representatives votes on the Sips operating committees.

By the summer, however, the SEC had mostly won these legal challenges. While the DC Circuit Court gave a win to the exchanges and vacated the bits of the commission’s efforts that would have allowed more industry representation on the plan operating committees, industry observers said that the commission got mostly what it wanted.

The question for market data consumers has been: When does this all come to fruition? The SEC eventually disapproved the fee filing in September, so it’s back to the drawing board on market data fees. One of the SROs’ arguments against the commission’s new market data infrastructure was that, whatever the fees were set at, there wouldn’t be enough businesses capable of, or interested in, becoming consolidators; it looks now, at least for the moment, that they might be right about that.

While there are experienced, respected names out there who would be willing, it’s probably nowhere near 12 firms—the number the SEC thought would be optimal for real competition to flourish. The most vocal of the competing consolidator hopefuls—MayStreet—was acquired by the London Stock Exchange Group, and will have other concerns now.

Other vendors that could feasibly be competing consolidators have also undergone M&A activity since 2020: Exegy merged with Vela Trading Systems, and Options Technology bought Activ Financial. All these businesses have just presumably had more pressing concerns than a business opportunity that remains, at this point, largely hypothetical.

The EU and the UK

For years—decades, even, by some accounts—data professionals and regulators in the EU have been hoping for progress on building a consolidated tape of market data in the region.

Mifid II laid out the provision for a tape, but a provider never materialized. Much like the situation with the equity tape in the US, that’s largely because the financial incentives have just not been there. But, post-Brexit, there is more and more urgency for the EU 27 to bolster its position as a financial center. The UK government, after all, has pledged to reform capital markets regulation to bring about a tape, including giving the Financial Conduct Authority (FCA) new tools to help it along.

In late 2021, the European Commission (EC) released a legislative package on its Capital Markets Union, including some amendments to existing regulation that were meant to make it easier for a tape to emerge.

The EC’s idea was to promote a tape for each asset class—equities, fixed income, derivatives, and ETFs—with a single consolidated tape provider (CTP) for each, working on a five-year, fixed-term contract.

As these announcements went out, industry participants started to see that the commercial proposition of being a CTP might be viable. WatersTechnology broke the story that the three dominant fixed-income trading venues—MarketAxess, Bloomberg, and Tradeweb—had formed a consortium to provide a CTP and had put out a request for proposal, seeking a third-party software provider to partner with. The venues confirmed this in June 2022, saying they would establish an independent company to operate separately from their core multilateral trading facility businesses and outsource the running of the tape to a tech vendor.

As the year progressed, other vendors announced they had produced CT prototypes or expressed their interest in becoming CTPs.

Fixed-income connectivity provider TransFicc produced a pilot for a tape, allowing clients testing the pilot to access its client library API, and to subscribe to a feed that publishes 30 fixed-income messages per second via low-latency messaging protocol Aeron. Investment management software vendor Finbourne said it had been looking to turn its flagship data aggregation platform Lusid into a consolidated tape. The vendor has also run a forum that it calls its Design Council, bringing together some 18 representatives from industry groups, the buy side and sell side, and consultants to discuss issues around the practical implementation of a tape.

Market participants say one of the challenges of building a CT under the current legislative framework is the cost of cleaning and aggregating unstandardized reported data, while ensuring that the data covers enough of the market to make it valuable for users to purchase the data.

At the root of these issues is the lack of standards from execution venues and Approved Publication Arrangements (APAs), which publish trade reports on behalf of investment firms, and must make this information publicly available for free 15 minutes after publication.

Regulation doesn’t mandate any particular format or standard for how the APAs must publish the data, however, and so market participants interpret post-trading reporting flags differently. Another issue is that firms trading non-equity instruments can choose to defer the publication of their post-trade data for weeks under certain scenarios, leading to gaps in the reported data.

Both Finbourne and TransFicc, as well as two other hopefuls, Ediphy Markets and Opensee, took part in a sandbox hosted by Dutch regulator the Authority for the Financial Markets. The AFM convened the sandbox, dubbed the Innovation Hub, along with the Dutch central bank. In this particular instance, the regulator wanted to drive better understanding of some of the data quality issues involved in creating a CTP, develop viable prototype tapes, and feed its findings back to the EC and the industry.

Last month, WatersTechnology reported that the Big Three consortium was deciding between three tech providers to partner with in its bid to win the contract for a bond market CTP. The three vendors are Ediphy, Finbourne and Opensee, said six sources familiar with the RFP process.

One concern is divergence between the EU and the UK. Market data users are concerned about the viability of a UK CT if the government adopts a model that allows for competing providers to come forward, rather than allocating the CTP to a single provider.

Back in March, Her Majesty’s Treasury published the response to its consultation on the Wholesale Markets Review, a review of the country’s financial regulation post-Brexit. The Treasury said in that response that promoting a competitive model would help meet the overall aims of having a high-quality and low-cost CTP.

Daniel Mayston, head of electronic trading and market structure at BlackRock, says that any CTP will have to make massive investments to build their offering, and a competitive model would diminish the promise of good returns.

“They would know they are competing rather than being awarded an exclusive contract or tender, and that the share of revenue up for grabs is automatically reduced by having multiple providers,” Mayston says.

UK lawmakers and the FCA have told market participants during industry forums that they favor competition because it will allow for the highest quality tape provider to emerge naturally.

Critics of this model say, however, that competition is good in most markets, but not when it comes to a service that would bill on a cost-recovery basis, as the CTP would. Mayston says that under the UK government’s approach, vendors would compete on providing a service that should not be differentiated and should be low cost.

A consolidated tape is about having a universal record of trades or a golden version of the truth. That is where I see a challenge around having multiple consolidated tapes: You’re by construction creating multiple versions of the truth

Daniel Mayston, BlackRock

“A consolidated tape is about having a universal record of trades or a golden version of the truth. That is where I see a challenge around having multiple consolidated tapes: You’re by construction creating multiple versions of the truth,” he says.

Any vendor that came forward as a CTP in the UK would have to replicate the labor and absorb the costs of building the tape before they knew what share of a limited market they could expect to attract.

“We don’t think [a competitive model] is viable. If there are 10 of them, and they only get 10% of the market, the cost benefits will not be there,” says Stephane Malrait, global head of market structure and innovation at ING.

The burden entails building connectivity to the different trading venues and APAs publishing the data, in addition to more standard business expenses, like handling payments, tech management costs, as well as hiring sales and marketing teams.

“If there is less revenue but the same costs, it will be a lower return,” Mayston says. “It’s difficult to see why or how the argument holds up that this would reduce costs or give a lower-cost version to consumers.”

So there was progress, of a sort, in 2022 on the contentious issue of the consolidated tape. But the bond market data void created by an absence of an EU tape has not remained empty. In recent years, a constellation of tech startups has risen to fill this need.

One consultant says that just as US market participants don’t rely solely on Trace data, EU market participants view the forthcoming fixed-income tape as a supplement to other market data sources that are already available.

“Instead they’re getting real-time evaluated pricing or real-time axes or runs or other information,” says Audrey Blater, head of risk and financial markets regulation at Coalition Greenwich.

These startups include Glimpse Markets, which bills itself as a network of buy-side institutions pooling bond trading data, and this year went live with 15 participants. Contributors submit their data anonymously to Glimpse and get back an aggregated dataset, being compensated for these contributions on a pro-rata basis.

Even if Glimpse—or indeed, Finbourne, Opensee or Ediphy—are not selected to provide the CTP, they will still be in a strong position, Blater says. Market participants often report Trace data to Finra via various analytics and reporting platforms offered by fintechs, making these companies “the pipes,” she says. She expects to see something similar happen to these contenders once the tape is established.

While it’s certainly not possible that either the UK, the EU or the US will see their respective regulators’ tape dreams materialize in 2023, this year did see efforts in all three jurisdictions gain ground.