The consolidated tapes are taking shape—but what shape exactly?

Market structure experts and data professionals are waiting with bated breath for details about future consolidated tapes (CTs) to emerge from technical discussions taking place behind closed doors in the EU and the UK.

After years of planning, debate, and vigorous lobbying, both governments have signaled their intent to forge ahead with the construction of CTs—key pieces of market infrastructure that provide investors with a live stream of trade data from venues across the jurisdiction. EU lawmakers struck a deal outlining the model for future tapes in the dying days of Sweden’s presidency of the Council of the EU. Meanwhile, the UK’s Financial Conduct Authority (FCA) has set out the framework for a tape and is now considering the responses to an industry consultation that closed in mid-September.

Before either framework is fixed in law, both sides must nail down some of the technical details, specifying exactly how they want their tapes to be run. Both the UK and the EU are currently focusing on the bond tape, with discussions on an equities tapes to follow, as well as a tape for European derivatives. And although it is the nuts and bolts—like the transmission protocol and the mechanism for fixing data quality issues—that will have the biggest impact for the tape’s users, contributors, and operators, it is the political questions around revenue and timing that continue to dominate.

The tape will by definition force consistency as there will be one tape. But will the data be an accurate reflection of the actual market? … It’s a garbage-in-garbage-out problem

Mark Schaedel, DataBP

So far, both sides have been tight-lipped about the progress of technical deliberations. But sources have told WatersTechnology that discussions are advancing, with the FCA poised to send out a new consultation paper, and the technical trilogues in Europe—negotiations between the Council, Parliament, and Commission—set to conclude any day now.

Quality quandary

In the European Commission’s original proposal for a CT, it noted that a lack of correct and timely information on prices and available trading volumes “affects the share trading landscape and the competitiveness of the EU as a financial hub.” And a market study by the Commission found that the cost to asset managers of a lack of accurate and consolidated bond market data was between 0 and 5 basis points of annual traded value.

The tape aims to remedy this by providing a single source of comprehensive data. Data quality is therefore front of mind for many observers, including Mark Schaedel, who works regularly with market data feeds in his role as CEO of licensing and subscription management services provider DataBP. He emphasizes the need for reliable inputs if the tape is to achieve the objectives set out in Mifid II.

“The tape will by definition force consistency as there will be one tape. But will the data be an accurate reflection of the actual market? Does one source make it the right answer? It’s a garbage-in-garbage-out problem,” Schaedel says.

In the FCA’s framework for a consolidated tape, it outlined a tender process where candidates meeting a minimum eligibility threshold participate in an auction. The bidder offering to provide the tape to consumers for the lowest price becomes the consolidated tape provider (CTP). This has caused some concern among market participants and technology vendors alike, who warn that it could lead to data validation and quality checks being axed by the potential providers to save money.

Chris Murphy, CEO of trading analytics and execution services provider Ediphy, has a particularly keen understanding of the difficulties of data aggregation. Ediphy has been working with Mifid data since 2018, and also launched an advanced prototype consolidated tape initiative for European bond markets with the support of the Dutch and French regulators in 2021.

“Unless there is a procedure for issues to be identified and reported back to the providers of the data, whether that be the venues, the APAs, or indeed the dealers that are contributing data to the APAs, then we’re not going to get a high-fidelity tape. The data is not going to be usable, and the whole project is going to be a failure,” Murphy says.

Murphy suggests that the consolidated tape provider should triage data quality complaints, reporting problems back to contributors and also to regulators where appropriate.

According to an market data consumer at a large European bank, the data that will be on the consolidated tape is already publicly available. The main proposition of a tape is to simplify the process of aggregating it. 

“You can get the data today, because it is freely available after 15 minutes. And we are doing that. There are two concerns from the system we have today that the CTP will try to solve: one is that gathering the data today is not easy, and the other is poor data quality,” they say.

By agreeing a standardized mechanism for collecting data and remedying errors that result from fat fingers or incorrectly categorized trades, legislators could make life much easier for market participants, the end-user adds. “That would be a win,” they say.

The question of how to articulate the transmission protocol for the tape has also proved contentious. As it stands, sources say that the UK and EU are set to take different approaches: the EU plans to give the CTP a choice of whatever transmission protocols the venues and APAs currently provide to their users, whereas the UK is leaning towards defining a common API that venues must conform to.

A single API would ensure conformity across all of the feeds coming in, allowing the CTP to perform an acknowledgement or non-acknowledgement of incoming data and publish common error formats for data that does not meet the validation criteria. But it would also be more expensive for venues if they had to code to a designated API.

“Given that there has been such a heated debate in Europe, my understanding is that the co-legislators have been somewhat reticent to put a single API in the framework, because that gives the venues justification for having another slice of the revenue pie,” Murphy explains.

For DataBP’s Schaedel, the underlying transparency problems that the tape is designed to address can only be solved if policymakers remain focused on the data flowing into the tape.

“We already have CTPs today—they’re called data vendors. But each of them lacks the ability to solve for the upstream data quality issues, and each varies in how they filter and manage data quality, leading to the inconsistency that undermines the value of their consolidated data products,” Schaedel says.

Pesky pricing

Anyone hoping that the focus on technical details means that the political stage of the process is now in the rearview mirror is in for some bad news. Even as lawmakers scrutinize the mechanics, long-running debates about how users are charged and contributors are rewarded continue to hog the limelight.

“Technical trilogues is a bit of a misnomer. It’s still very political. And only the technical aspects that have a political ramification are being discussed,” Schaedel says.

When it comes to revenue distribution, the EU has proposed a multi-tiered model that would see contributors to the tape compensated in a set order: smaller venues that are more reliant on their market data business first, then trading venues with IPO markets, and finally other venues in the order of the pre-trade transparency they can provide.

James McKeone is the head of European data products at Nasdaq, one of the main operators of the US consolidated tapes and which also runs primary markets in the Nordics and Baltics. “We really want to see a revenue model that remunerates price formation. It should be noted that exchanges spend lots of time and money on ensuring that there’s high-quality prices for customers. It’s important for European markets that that continues.”

Schaedel agrees, adding that the revenue distribution model is an opportunity to create incentives for firms to participate in the displayed market. “The big fear exchanges have beyond the direct commercial impact is that this just becomes a tool for more internalization—trading away from the exchanges. If you think about what the displayed market participation means, you’re informing investors about the state of the market, about the conditions that they’re investing in. So if you can attract more displayed liquidity, you’re enhancing the value of the tape by definition,” he says.

The revenue distribution proposals from the Swedish compromise in June suggest that only the venues contributing market data should be remunerated. How market participants could be rewarded for displaying liquidity is still an open question, but incoming changes to the deferral regimes for bonds in the EU and the UK are already slated to bring the data on future tapes closer to real time.

Another technical point caught up in commercial interests concerns value-added services. These could include evaluated pricing, liquidity scoring, and even maintaining the historical tape of record. What counts as a value-added service as opposed to a core service of the CTP is currently under discussion. This could be an important tool for regulators trying to make the commercial proposition sufficiently appealing to attract bidders in the tender process.

But data vendors say that a CTP providing value-added services from data that they have obtained for the tape would be at a competitive advantage. Though Nasdaq’s McKeone has a caveat: “It’s fine that the consolidated tape provider is allowed to offer value-added services. [But] if they do that, then they should pay the price of the market data at the market rate. Because if you don’t do that, you have a situation where they receive data for free that’s originally intended for a regulatory purpose to provide the consolidated tape. But then they’re offering competing products at a price point that we wouldn’t be able to replicate.”

On the other hand, Alex Wolcough, CEO of consultancy firm GreenBirch Group, stresses that data being used for the core tape must be contributed by venues for free, with no hidden charges for redistribution. Wolcough worked on a project to create a consolidated tape at Reuters (which later became Thomson Reuters, and today is Refinitiv) and knows firsthand how costly it can be getting venues to supply their data.

“There needs to be a mandate that data is contributed free of charge to the consolidated tape provider without any restrictions or redistribution fees held against the consolidated tape provider. It’s just really, really important that they make sure that the contributors of data aren’t finding some way of screwing over the consolidated tape provider, and, ultimately, the end user of the data,” Wolcough says.

Data races

The UK has said that it wants a CT for bonds up and running by mid-2025, which means that it may well leapfrog Europe. The already cumbersome legislative process in Europe is likely to be slowed down further by parliamentary elections in June 2024. But there is significant pressure to catch up the lag that is developing with the UK—not to mention the US—as the French and German finance ministers highlighted in their open letter earlier this month.

“There’s a political race here between the UK and EU. Both the policy leads want to be first. Maybe that’s good right now to get something done, but I think they then have to sober up a bit and start thinking about what this means for sustainable markets and CMU in particular,” Schaedel says, referring to the Capital Markets Union, a plan to make the EU more attractive for investors.

End users of the data will be closely watching the decisions made in the coming weeks. Rushed negotiations could yield a worse quality tape, or less value for money. And the addition of a new feed will bring about more work surrounding contracts and connectivity. “Initially it will probably make their lives more complicated, switching costs and the transition period in anything like this will create operational complexity,” Schaedel says, noting that some data users will also become contributors to the new trade reporting regime regulated by ESMA. “But the end goal is for it to simplify data sourcing and create a single source, a single contractual framework,” he adds.

By the end of the year, many of the outstanding question marks should be resolved. The EU intends to put a fleshed out blueprint of the tape into a level-one text before 2024, but sources say that a finished law may be ready to go through Parliament in a matter of weeks. The FCA aims to put out a policy statement by December 2023, but observers say that this too could come sooner. Then a host of other variables come into play—from competition law to regulatory technical standards – before the tender process finally gets underway.

For now, though, venues, vendors, and consumers of data are awaiting news from the technical discussions, eager for more hints on what the finished product will look like (and, perhaps, what it will cost). “The devil is in the detail,” says Nasdaq’s McKeone. “The deal is done, but we need more clarity on some of those technical aspects—that’s really the most important part.”