Hurry up and wait: EU debates potential models for ‘essential’ consolidated tape

When the EU laid the legal foundations for an equities consolidated tape (CT), it reckoned on private entities rushing to become the provider. The revised Markets in Financial Instruments Directive (Mifid II), which came into force in 2018, stressed that “it is essential that an effective and comprehensive consolidated tape is in operation as soon as possible.” The fact that the directive allowed just two years for private initiatives to emerge before it enabled the regulator to review the situation and initiate a public procurement process hints at the urgency with which legislators expected firms to oblige.

In reality, the process has been less than straightforward. The matter lay dormant for several years when no regulator-backed contenders for the role of consolidated tape provider (CTP) emerged. Both the European Commission and the European Securities and Markets Authority (Esma) attributed this to a lack of commercial incentives, as well as potential competition from data vendors.

A proposed review of Mifid II and Markets in Financial Instruments Regulation (Mifir) has reinvigorated the debate, but the question of how to facilitate the provision of a CT has proved contentious. Even as the legislative process is on the brink of culminating in a blueprint for the CT, lawmakers are still at loggerheads. Questions linger over what data should be included on the tape, the latency at which it should be delivered, and how it should be governed.

For all their differences, however, legislators agree on one thing: A tape is sorely needed. The European Commission, which initiated the review, said that “a true single market cannot exist without a more integrated view of EU trading,” positioning the tape as a central pillar in its Capital Markets Union plan, designed to increase the attractiveness of European markets.

This view is largely shared by the industry. Cboe, which runs a European equities exchange offering over 6,000 securities across 18 markets, has been a prominent voice calling for a CT for years.

“Europe has a liquidity problem,” Natan Tiefenbrun, president of Cboe Europe, tells WatersTechnology. “The European markets are underperforming in terms of the breadth of participation and the depth of liquidity. And while there may be lots of contributing factors, siloed financial markets infrastructure—across trading, clearing, and market data—is a key one, and creates a lot of extra cost and complexity for market participants.”

Cboe contends that a single electronic live data stream providing pricing data on European equities would simplify investors’ access to data, encouraging greater retail participation and promoting a pan-European approach to investment.

“Absent a CT, what tends to happen is that firms of all kinds ration their consumption and use of data. They’ll take data only from a subset of markets or a subset of venues. … And so they’re limiting their interest and appetite to trade in Europe. And whole big swaths of firms just say, ‘Oh, Europe’s just too complicated, I’m not even going to bother trying,’” Tiefenbrun says.

For end users of market data, another key appeal of a CT is the promise of reduced costs. Article 13 of Mifir says data should be provided by trading venues on a “reasonable commercial basis,” but the Commission’s text on the Mifir review concedes that “that article has not delivered on its objectives.”

“As the buy side, we struggle with data costs,” says Susan Yavari, senior regulatory policy advisor at the European Fund and Asset Management Association (Efama), which represents more than 4,500 asset managers in the EU. “Year in, year out, we see these spikes in the amount we’re charged for the data. It’s similar data, the technology to deliver data hasn’t changed, but without rhyme or reason the data costs go up, the licensing becomes more complex.”

A CT based on a technical standard drawn up by Esma could help keep costs down for end-users and the asset owners who they represent. One model mooted by respondents to an Esma consultation paper in 2019 is that of a “utility-like system,” with the CTP charging firms a nominal fee in the range of €10,000 to €20,000 per year to receive the data.

But the precise business model of the CT remains one of the thorniest issues. Lawmakers trying to thrash out a compromise have to contend with varying estimates of profitability for differing hypothetical models of the tape, as well as seeing through the entrenched commercial interests of industry players who are trying to influence the legislation.

Exchanges enter the fray

In February this year, 14 European exchange groups operating in all but one of the EU’s Member States, announced an initiative to participate in the future selection process for the CT. In doing so, the group became the only entity to publicly state its intention to compete for the tender. The exchanges, which include Nasdaq, Deutsche Börse, Euronext, and SIX Group, have signed a term sheet to establish a joint venture, which they expect to be incorporated in April.

“We feel it is true that part of the of the equity landscape is quite opaque—namely over-the-counter (OTC) trades and approved publication arrangements (APAs), etcetera. Sometimes, professionals can access this information quite easily, but not the rest of the market,” a spokesperson for the group tells WatersTechnology. “We’re doing this mainly to be a part of the solution, to contribute to increasing the transparency of the European Union’s markets.”

APAs are organizations authorized to publish trade reports on behalf of investment firms. Mifid II says that this information should be made available to the public free of charge 15 minutes after it is published, but it does not stipulate a single format for the reports. Asset managers are left to extract and consolidate data from a patchwork of different file types, including CSV and JavaScript Object Notation (Json).

OTC derivatives accounted for 85% of the notional value of derivatives traded in Europe in 2020. Because this asset class is not traded on exchanges, it is harder for market participants to stitch together a coherent view of the prices. Varying data quality can even make it difficult to identify the instruments within OTC derivatives. In this context, the provision of consolidated real-time data on equities could help promote better quality and standardized data in other parts of European markets, too.

In a press release, Efama welcomed the exchanges’ bid to build a CT. But the trade association’s director general, Tanguy van de Werve, said “the consolidated tape should meet the needs of market participants, and in no way be used to render European exchanges’ own proprietary feeds more attractive.”

“Traditionally, the exchanges have opposed any kind of tape,” says Efama’s Yavari. “I think they’ve understood that there’s such strong support in terms of capital markets depth and our ability to retain investments in Europe and draw global investments into Europe. For all those reasons, we do need to be able to provide this fundamental basic infrastructure that investors will need to trade in European securities.”

The provision of price-forming market data to institutional investors represents big business for exchanges. Some of the exchanges involved in the joint initiative have historically resisted calls for a consolidated tape or pressed instead for a tape comprising only post-trade data and excluding the more valuable pre-trade feeds.

“As a joint venture, we’re absolutely agnostic on that,” says the spokesperson for the participating exchanges. “The idea is to provide whatever the regulation asks us for. Here you have to differentiate between our hats as members of exchanges—we have an idea of what is best for the European Union in terms of a CT, and we will still keep on lobbying and pressing our vision of a CT—but as members of the joint venture, we are not lobbying in any way, and we are absolutely agnostic.”

The exchanges within the joint venture were contacted for interviews in their capacity as individual entities, but all either declined to comment or did not respond by press time.

In 2021, a group of banks and asset managers commissioned consultancy firm Adamantia to conduct a feasibility study assessing the viability of a European equities CT. Adamantia’s report, which is based on a functional analysis of 50 market data use cases across the value chain, from front office to back office, concludes that “the scenario of a post-trade-only equity CT does not break even.” By excluding pre-trade data, the report says, the CTP would severely limit the number of addressable use cases. In contrast, Adamantia found that a pre-and post-trade tape would break even after three years.

A post-trade only CT would not make much sense in the European context. … We suspect that the regulated markets are mostly interested in the preservation of their data revenues

A sell-side end-user of market data from a bank

“Consolidating all the post-trade data into one place makes sense in general. But post-trade data alone would not bring enough value for the users to change their current consumption of market data,“ says Antoine Pertriaux, a partner at Adamantia.

Consuming data from the CT requires the integration of new data streams into firms’ systems and processes and involves many changes and investments that would be made only if they brought significant benefits, he explains. Getting post-trade data only from the CT would mean that market participants would need to consume other data sources anyway to capture pre-trade data.

“Since most data packages they buy today bundle pre-trade and post-trade data, adding the CT as an additional data source does not make sense,” Pertriaux says.

At present, the main legislative bodies of the EU are at odds over the precise data that should be included in the CT. The European Council appears to be proposing a snapshot pre-trade tape on which data becomes available only after trades are executed. The European Parliament, meanwhile, is calling for pre-trade data on the top five best levels of bids and offers to be made available in near-real time, while the Commission suggests a purely post-trade tape.

An end-user of market data from a bank tells WatersTechnology that a post-trade-only CT “would not make much sense in the European context. … We suspect that the regulated markets are mostly interested in the preservation of their data revenues.”

The spokesperson for the joint venture says the group is neutral on the final model of the tape and has prepared detailed plans for each contingency. “We want this to be successful. But each scenario has pros and cons in terms of complexity and technology,” they say. The Parliament’s proposal of pre-trade data on best bids and offers, for instance, could create “challenging issues in terms of data sequencing,” whereas a post-trade-only CT would yield lower revenue but also lower costs.

Red tape

Due to the distances between European trading venues, a consolidated tape would inevitably have a certain degree of latency. This rules out speed-sensitive use-cases like high-frequency trading and market-making. Instead, CT data is more likely to provide a lower-cost market view for individual consumption.

“If it’s investment decisions, then you can get a sense as to what the market liquidity is like, how many levels there are, and where the volume is, which might help a trader decide whether or not to buy,” says Alex Wolcough, CEO of consultancy firm GreenBirch Group, adding that the direct feeds from exchanges will still be favored for price formation.

The bank executive agrees that “we need low-latency data, and we will always take that on a direct feed from the exchanges,” citing use-cases like market-making, executing orders to hedge derivatives, and keeping up with arbitragists.

“I’m wondering whether it’s really going to have such a big impact on market data revenues or not. We’ll have to see, but I don’t think it’s as big as the exchanges might worry,” says GreenBirch Group’s Wolcough.

Nonetheless, by announcing its intention to build the CT, the joint venture will likely gain a bigger role in the advocacy process as the European Commission, Council, and Parliament try to arrive at a mutually acceptable model for the tape. The trilogue is expected to begin in April. It could conclude as early as September, but negotiations between the three bodies can become protracted and have been known to last for a year.

As well as the big question of which data will be included on the tape, another key unresolved point is that of the revenue-sharing model. An initial proposal by the Commission to require APAs and multilateral trading facilities (MTFs) to contribute their data without compensation has not been adopted. Instead, both the Council and the Parliament have put forward models that would see venues compensated in a certain order: smaller exchanges first, then other venues in the order of the pre-trade transparency they can provide.

The European Council’s compromise text, which is the latest piece of proposed legislation on the matter, talks about redistributing revenue “based on the data contributed.” Cboe’s Tiefenbrun says this leaves room for interpretation.

“The problem is, what if Deutsche Börse contribute their data, but they say, ‘We’re only allowing our post-trade data to be published,’ while Cboe says, ‘You can publish our real-time pre-trade data, too.’ In theory, we’d both be compensated the same, because we’re contributing similar data, even though we’re being much more pro-consumer.”

The European Parliament, on the other hand, proposes to reward data providers based not only on the value of the data they contribute, but also on what is then disseminated to users.

Another sticking point is the timeframe. In the current plans, the CTP is given just six months between winning the tender and going live.

“If you consult anyone in the industry with some technical background, they will say that it is absolutely difficult to develop the feed handlers in order to be in production within six months with so many sources to integrate,” says the spokesperson for the group of 14 European exchanges, adding that the joint venture is pressing for the timeframe to be extended to 12 to 18 months. “We can adapt to whatever regulation asks us, but we’ll be much more comfortable with more time.”

Here’s one I made earlier

The US Securities and Exchange Commission established a consolidated tape for equities price and volume data in 1976. The success of the US model has loomed over discussions of a future European tape, in spite of structural differences between the two.

“If you look at the US market, they’ve had a CT for 20 years now, and this has included top-of-book pre-trade data since the beginning,” says Adamantia’s Pertriaux. “The SEC is even considering extending the depth of pre-trade data available in the CT to the first five limits of the order book. This should also fuel the debate we are currently having in Europe.”

The spokesperson for the joint venture pointed out that the US model provides a surer business case by mandating consumption of the data, a move that has been ruled out by European legislators. “We are now in uncharted territory, because in the US you have an obligation to consume the data,” the spokesperson says. “Here, the tape is just another provider, that’s it. So we cannot say anything for certain in terms of revenues, because we do not know how many clients we’re going to have. It could happen that some investors are happy with the traditional offerings of vendors, and some other investors would need to have the 100% coverage that we are going to offer. It remains to be seen.”

Another important departure from the US model is the number of contributors. Where 16 exchanges provide data to the US tape, the proposed European version could have as many as 180 data sources, according to the spokesperson for the joint venture. And where most trades in the US take place over a 40-mile triangle on the East Coast, a European tape would occasionally have to shuttle data some 1,800 miles between Warsaw and Madrid.

This prompted Nasdaq, a participant in the joint venture, to publish a blog entitled “Why physics makes a pre-trade tape impossible.” In it, Nasdaq suggests that a European tape showing best bids and offers would have transmission latencies of up to 32 milliseconds.

The bank end-user says this latency would not be a problem for some use-cases, however.

“When you have an algo, you have to control the behavior of your algo: It’s an internal risk requirement and a regulatory constraint under Mifid II. To do that, you need to replay the behavior of your algo with some seconds of latency to check that what you did two seconds ago was correct. And you need to do that, ideally, with an alternative source of data. A very good alternative source of data for that purpose would be pre-trade consolidated tape. And the fact that it has a 100-millisecond latency is not an issue; you just have to know what data corresponds to what timing, and to be precise to the microsecond,” they say.

As the trilogue approaches, expect more market participants and interested parties to set out their own visions of a successful consolidated tape. It is even possible that alternative contenders for the provision of the tape will throw their hats into the ring as the legal particulars are thrashed out and an outline of the future tape begins to emerge. The “ever closer union” remains deeply divided when it comes to market data, and it seems that no amount of tape can patch it up.