EU lawmakers struggle to find common ground on equities CT

After years of glacial progress on the implementation of a consolidated tape (CT) for European equities, the debate over its hypothetical operator is heating up once again.

The idea of a continuous, publicly available stream of European market data goes back to at least the 1970s. But in recent years, both the Markets in Financial Instruments Directive (Mifid) and its successor Mifid II/Mifir failed to produce a regulator-backed candidate to build the tape.

In November 2021, the European Commission brought the tape back onto the agenda with a legislative proposal amending Mifir. The European Council and European Parliament responded with their own proposals for a CT, but huge discrepancies between the three texts only highlighted that the question remains as contentious as ever.

The biggest sticking point was the data which should be published on the tape. The Commission initially suggested that the tape include only post-trade data, whereas the Parliament also called for pre-trade data on the top five best levels of bids and offers. The Council, meanwhile, proposed a snapshot pre-trade tape on which data becomes available only after trades are executed.

To reconcile their differences, the three co-legislators entered a trilogue process in April. While the Commission’s position appears to have shifted slightly in favor of the model suggested by the Parliament, there are still some significant sticking points, and the Commission has now been tasked with finding potential solutions acceptable to all three bodies.

Legislators may derive a little comfort from the fact that some commercial entities are now expressing a tentative interest in building the tape—or at least participating in the decision-making process.

On April 12, a group of financial institutions operating in Europe came forward with a proposal to create a user-led tape.

The group, which currently includes Barclays, BlackRock, Crédit Agricole, Societe Generale, and UniCredit, commissioned consultancy firm Adamantia to conduct a feasibility study in 2021. Adamantia found that an equities CT could be commercially viable, but it opposed the creation of a tape that only includes post-trade data, arguing that this model would not break even.

In the recent announcement, the group said that it was assessing the different technology options and operating providers for the tape. More surprisingly, perhaps, it also said that it had approached a group of 14 European exchange groups to explore possible collaboration.

Antoine Pertriaux, a partner at Adamantia, believes that finding consensus among other market players could be a boon for the project.

“The objective is really to make it a project led by the industry for the industry, and this is why we have opened the doors to all market participants without exception: any player who aligns on the key principles that were drawn by our analysis (a user-governed, real-time pre- and post-trade equity tape, accessible on a reasonable cost basis) is welcome to join the initiative,” Pertriaux says, adding that the group is currently in discussion with some large asset managers and sell-side firms who might be interested in joining the initiative.

The venture represents, to the regulator and the market, a credible alternative to the only current public candidature, the exchanges, and it supports the adoption of the fully fledged tape, he says.

The group of institutions led by Adamantia is calling for the Parliament’s model of a consolidated tape, which includes real-time pre-trade data.

“If, at the end of the trilogue, the legislators opt for a post-trade-only tape, our initiative will stop. No financial institution will want to finance or participate in the development of a tape which is not viable,” Pertriaux says.

The joint venture comprised of European exchange groups stated its intention to compete for the tender in February. A spokesperson for the initiative told WatersTechnology that “the joint venture is well on track for being ready to provide a solution for a CTP [consolidated tape provider]. We are prepared to provide any kind of tape based on the final outcome of the legislative process.”

Technical difficulties

While companies with interests in the sale or consumption of market data have been competing to advance their visions of an effective tape, the technicalities of putting together such an ambitious project have occasionally been overlooked.

The eventual CT operator will be confronted with a very big job. Tech provider Finbourne, which has been involved in plans to build a CT for fixed income products in the EU, says the challenge is the depth and latency of data, as well as the connectivity into and out of any CTP.

“The sheer scale of data retention required, alongside storing any historical data and providing querying or web UI, is a tremendously complex challenge that needs a technology firm to provide the platform solution,” a Finbourne spokesperson tells WatersTechnology.

Graham Dick, market structure analyst at Aquis Exchange, has a first-hand understanding of the difficulties inherent in creating a CT. In 2012, he co-founded a partnership, Coba, that spent a year trying to establish a tape for European equities.

“Eventually, it always ends up in a commercial debate, with companies on different sides of the aisle arguing for lower data prices or higher data prices. A lot of people are just talking about pricing, too few people are actually talking about transparency and quality of data and improving things for the whole market,” Dick says.

One crucial thing that has changed since Dick’s participation in the Coba initiative to put together an industry-led equities tape is the notion of mandatory contribution from venues.

“That’s absolutely essential,” Dick says. “Coba didn’t have that. We only had voluntary contribution. And although we got quite a lot of sensible people in a room with different opinions, we didn’t have everyone.”

The technical cost of doing the post-trade tape is probably a fifth of the pre-trade tape

Chris Murphy, Ediphy

However, this is only the first hurdle. At the heart of the debate lies a question about what data the tape should include. Dick worries that a tape which publishes pre-trade data could consolidate latency and attract arbitrage by frontrunners with access to fresher information. He also sees this option as more challenging to build.

“That’s why I’m cautious about any mandatory pre-trade tape. Indicative pre-trade is okay, even voluntary pre-trade is an option. But mandatory use of the pre-trade tape for multiple different use-cases is just going to delay the release of any sort of consolidated tape at all for another 10 years. I think that’s very dangerous.”

Dick agrees that pre-trade data can bring a competitive advantage to the European market. The US has a consolidated tape for top-of-book pre-trade data, and he recognizes that it has brought more transparency and more investment to the US market.

“But it has also brought high-frequency traders drilling holes through mountains. And in the US, datacenters are tens of miles apart, not thousands of kilometers apart as in Europe,” he says.

And then there is the question of revenue allocation. Dick says that developing a model for divvying up the proceeds between contributors to Coba’s tape project was not straightforward.

“When we looked at the mathematical nightmare of working out any allocation model for pre-trade, it was infinitely more complicated than any revenue allocation model for post-trade. Because what constitutes a pre-trade quote? How long should the stock be resting there to constitute a quote? How do you avoid flash quotes? Is one share as good a quote as a hundred shares?”

Many of these questions will be resolved by the European Securities and Markets Authority (Esma), which is charged with drawing up a technical standard for the tape once the EU bodies have agreed on a model. According to Chris Murphy, CEO of trading analytics and execution services provider Ediphy, the precise blueprint which the co-legislators land on will have a big impact on how the tape is put together.

For example, the various drafts proposed by the Commission, the Council and Parliament have different positions on whether or not the CTP can define the API by which the data providers need to contribute to the tape. The original Commission proposal suggests that the contributors provide data to the CTP using their native, commercially available APIs.

“That changes the solution quite a lot. If the CTP is defining the API, then you can start to have a very normalized interface, with ack and nack [an acknowledgment or a non-acknowledgement of the feed coming in, under certain validation rules]. If the CTP needs to conform to every API out there, then the cost of doing that is a lot higher and potentially you’re not going to be able to have that at ack/nack protocol,” Murphy explains.

Another unresolved question concerns the mastering of deferrals, which could happen either at the CTP level or at the individual exchanges and APAs. If it happens centrally at the CTP, there can be more consistency in how the different rules are applied, regardless of jurisdiction or venue.

It is also unclear how the output of the tape will be envisioned. “Is the output just a streaming firehose of updates, or is there some enrichment and cleaning? For example, on the fixed income tape, you’re dealing with a lot of cancel and amends. A trade comes in and then, two days later, it gets canceled and amended with a different notional or a different price. Is the CTP supposed to publish a historical tape of record, where it’s updating that data? Or is it just pushing out those updates, and it’s up to every consumer to then piece that together?” Murphy says.

Technical questions about how the tape is constructed can also impact commercial ones. Advocates for the model of the tape proposed by the Council (a snapshot pre-trade tape on which data becomes available only after trades are executed), say that a full pre-trade tape could take too long to compile. Those calling for the Parliament’s model counter that anything short of a full pre-trade tape could fail to attract customers.

“The technical cost of doing the post-trade tape is probably a fifth of the pre-trade tape, simply because the amount of trades is an order of magnitude lower than quote updates that you would need to deal with if you’re looking at order book data,” Murphy says. “I think the problem with the snapshot at the time of trade is that the CTP will have all the costs of doing a full pre-trade tape to take the snapshots without the ability to cover the cost of doing so, because you can’t sell the real-time pre-trade feed.”

Adamantia’s Pertriaux agrees. “All the alternative proposals to a full pre-trade tape being considered today still require the consolidation of all pre-trade data, even if they then hide some of that data to the users. So the cost of building it will remain the same, but the revenues it generates will not. I’ve not seen a market participant ready to pay for the post-trade equity tape, as the value added is too limited. How can this version be economically viable?”

On the other hand, the Finbourne spokesperson points out that it could be technically challenging to deliver a real-time pre-trade tape which also offers low latency at a competitive price, as it would require a complex technical format to capture and link pre-trade data with post-trade records.

“The scale and scope of pre-trade data ingestion increases significantly, and using low latency capture and distribution systems will be key to building an effective solution as part of any equity CTP,” the spokesperson says.

Data drama

The challenge of building a consolidated tape starts even before a CTP scrutinizes the technical standard drawn up by Esma, however. The fragmentation of European markets makes standardizing and cleaning up the prices coming from disparate venues and jurisdictions an unenviable task. Rainer Riess, director general of the Federation of European Securities Exchanges (Fese), feels that data quality problems should have been addressed before work started on the CT.

“The better the data standards, the more meaningful a tape will be [and] the higher information gain via a tape. Loopholes and waivers discussed under market structure proposals from both Council and Parliament may dilute the usefulness of the tape,” Riess says. “We think a tape can be useful if it will show finally what 100% of the trading in European market is, but it is not the magic bullet that will solve a lot of the ills of [opacity] that the European market has, simply because a lot of this is rooted in market structure,” he adds.

If the data quality doesn’t improve… crap in equals crap out, and there’s no point in producing the tape at all

Graham Dick, Aquis Exchange

Aquis’s Dick concurs. “If the data quality doesn’t improve… crap in equals crap out, and there’s no point in producing the tape at all. This is the Achilles’ heel of some of the people arguing for a pre-and-post-trade tape. They’ve got to get their own act sorted out first by improving the quality of their OTC data, stopping the duplicated reporting of trade reports, making sure that the right person is reporting the right trade, and that those things are all going through their APAs correctly, which is not the case today,” he says.

The main data shortfalls cited by critics of a pre-trade tape concern over-the-counter trade reporting and data from systematic internalizers (SIs), which can be difficult to access and are of varying quality.

Another concern is that providing data on the top five levels of the order book, as proposed by the European Parliament, could ultimately detract from the market’s competitiveness. “We worry that you will create a quasi-benchmark, which brokers can use to say ‘I’ve given you European best bid and offer.’ So the reality is that a lot of the market will probably be satisfied with a benchmark that is not very difficult to beat,” Riess says.

Others say exchanges are concerned with protecting the revenue streams from their data businesses. For Riess, however, this argument overlooks the ways in which exchanges invest revenue from data businesses elsewhere.

“Exchanges provide high-quality data and derive revenue from them. Exchanges invest in forming prices that are the valuation benchmark everybody uses. And exchanges fulfill other functions, such as the listing function [and] market surveillance that may suffer if less revenue is available to finance such services, possibly threatening the viability of smaller markets,” Riess says.

“Exchanges are basically being asked to provide their high-quality data, which are currently a revenue source, to clean up the mess on the SI and OTC side,” he adds.

For all the excitement surrounding the CT, there is still a long path ahead. The trilogue process has been known to carry on for over a year, and with the co-legislators still firmly at odds on a number of key issues, this particular file may well end up on Spain’s desk when the country takes over the rotating presidency of the European Council from Sweden in July.

The chorus of voices calling for different approaches to market data consolidation will only grow louder as plans for the tape solidify. But those waiting for a quick decision from the EU would be well advised not to hold their breath.