In a union of rivals, three major operators of fixed income trading venues—Bloomberg, MarketAxess, and Tradeweb—have been planning a consortium to deliver a regulated consolidated tape (CT) for bonds in the European Union, industry sources say.

WatersTechnology understands the initiative is something of an open secret among the community of vendors and consultants involved in developing CT prototypes as the industry hopes a regulatory review will remove commercial obstructions to the emergence of a tape provider (CTP).

All three companies repeatedly declined to confirm the existence of the plans for the consortium, which are said to be on hold pending the outcome of the review of the second Markets in Financial Instruments Directive (Mifid II).

But six of the 17 sources WatersTechnology spoke to say they are aware of the joint venture in the works. The other sources are not, but say such a joint effort would make sense, as the three venue operators have the means to consolidate the data ingested via the regulated approved publication arrangements (APAs) they run and have the technical expertise to build a tape.

A senior executive at one of the three venues says APA operators have an advantage over other vendors hoping to become a regulated CTP.

“The candidates who already have existing experience in operating APAs, in my opinion, would have much higher confidence in terms of their delivery of a CTP than those candidates who have not delivered or don’t operate an APA. The reason for that is quite simple: the technical difference between an APA and a CTP is marginal,” the source says.

All three run multilateral trading facilities (MTFs) under Mifid II, and control most of the volume traded in electronic fixed income markets in the European Economic Area. Data published by the European Securities and Markets Authority showed that, in 2019, Bloomberg, MarketAxess, and Tradeweb accounted for 84% of the fixed income volume traded on MTFs in the EEA, which amounts to €12.6 trillion ($14.2 trillion).

Comments by Bloomberg also show the firm is open to the idea of becoming a CTP of some kind.  

“When we understand the regulatory environment in which a CTP will be required to operate, we will consider the merits of offering such a service,” says Bloomberg’s head of trading venues, Nicholas Bean, speaking on behalf of the firm only, not of the rumored consortium.

Many firms and industry associations have already been granted a sneak peek of the regulatory proposals concerning a CT, which are part of the Mifid II review. The draft proposals are due to be published today (November 23) but they were leaked late last week and seen by WatersTechnology.  

In October, Liz Carter, managing director of trade reporting and clearing at Tradeweb, spoke to WatersTechnology about the design of a CT and whether EU regulators should mandate for multiple CTPs or a single provider to come forward.

“A bond CT should first and foremost be simple in design with a clear focus on eliminating the core challenges for market participants, such as non-standardized data and data fragmentation,” she said. “A multiple CTP per asset class model could potentially have the adverse effect of de-incentivizing potential providers to step up due to increased uncertainty and risk around operational cost recovery.”

A three-horse race

Bond market participants in the EU have pinned their hopes for greater market transparency at an affordable cost on a CT, looking with envy to the US, where the Trade Reporting and Compliance Engine disseminates transaction data for a range of instruments in real time. Currently, Mifid II does not mandate the submission of data to a tape, as US regulation does to Trace, and vendors have said there is no business case for becoming a CTP.

But the industry hopes that, as part of changes to Mifid II, lawmakers will require venues to contribute data to a CT. Indeed, the draft proposals indicate that the European Commission wants mandatory contributions of harmonized market data directly and exclusively to a CTP.

The head of multi-asset trading at an investment management firm says the firm’s data costs, including associated connectivity costs, are “fairly high,” which is “related to the fact that you have three [MTFs] with a 90% market share, and not five or 10 MTFs like you have in the equities space.”

“The fact that in fixed income you have this oligopoly has unintended consequences on certain pricing factors. And that’s why, if these guys set up a CT provider, it definitely has to be governed as its own individual company and not part of each firm. It has to be clearly separate from the operative MTF business,” the source says.

The head of rates trading at a European investment bank agrees, saying a consortium-led tape should be run as a separate utility from the venues’ other businesses and would require a stringent governance structure overseen by regulators.

In fact, sources say that failing to set up a CTP as a separate corporation would mean EU competition authorities would be unlikely to approve it.

“From a structural perspective, my assumption would be that they set up a joint venture, a separate company where they bundle their intelligence and their data,” says the head of multi-asset trading at the investment management firm. “But they wouldn’t do it in the current framework, because I think the competition authorities would raise their flags.”

A market structure executive at a second European bank says the three heavyweight firms would have to agree on a neutral third party to provide the technology.

“Each one of them could believe that they have the best technology to build the CTP, but why should you use the technology of your competitors to create it with you? They have to go to a neutral party, making it a bit more difficult for them because they don’t own that neutral party and they would have to outsource it,” the source says.

The rates head at the first bank argues that, for the CT to work, the venues should not use the data to create “a profit-making machine.”

“The APAs are in the best position to produce the tape. I would not have any objections to them doing it as long they understand it is going to be a utility for the common good, and the pricing of receiving data from a tape should be in line with the cost—there should be no added cost on top of that.”

The executive adds that the three MTF operators could use their position as a CTP to corner the market and create additional products based on the tape data with heftier price tags.

Sources say this makes sense: for any tech firm looking to provide a CT, much of the appeal is becoming the gatekeeper to a treasure trove of data. Vendors can bundle up the trade data with analytics and sell it to clients. Vendors hoping to put their names forward as possible CTPs, such as Ediphy and Propellant, have adopted this type of business model. Even if venues provided the tape at a low cost, the name recognition from the service or the commercial control of the data could provide a lucrative boost to related products.

Sassan Danesh, managing partner at Etrading Software, says a venue-led CT could create a conflict of interest in how the venues provide the CT and other data services. He says there would be little motivation for the venues to invest in providing a high-quality CT at a low cost if they are also offering more expensive value-added data products based on the CT data.

“Where is the incentive to make sure that the cost recovery service is of appropriately high quality? The conflict comes in the fact that, from a commercial perspective, they will gain if people take the proprietary commercial service they are offering, instead of taking the CT service,” Danesh says.

Scoping out the model

While vendors of market data feeds have over the years expressed support for certain CT models, there are fears that the version EU regulators want—a low-cost, low-latency CT—could undercut their business.

The market structure executive at the second bank says the three venue operators may have decided to put forward a united proposition as a way of protecting, future-proofing, and even growing their data businesses. The executive points to the equities markets and how exchanges now reap more revenue from data services than from their connectivity fees.

“If you look at the equity space, the revenues that exchanges get from their data are much bigger than the revenues they get from their execution activity, whereas in fixed income the revenue amount is the opposite,” the executive says. “If it’s going like the equity model, the potential opportunity to get a bigger data revenue in fixed income could be important for them.”

According to two sources, the venues have also felt pressure from EU regulators to put forward a CT proposition.

Both the market structure executive and one vendor hoping to provide a CT say EU regulators approached Bloomberg, MarketAxess, and Tradeweb to discuss how they could produce a CT together.

Tilman Lueder, head of securities markets in the directorate-general for Financial Stability, Financial Services and Capital Markets Union (DG Fisma) at the European Commission, has been leading lawmakers’ efforts to implement a CTP for the EU market.  

Asked whether Lueder had encouraged the three firms to submit a joint CTP proposition, an EU official writes in an email: “Several potential providers approached the commission’s services (Fisma) and presented various models on how they would achieve consolidation of bond market data. Mr Lueder did ask all entities that submitted their ideas to provide cost estimates for the set-up and operation of their projects (as this information is part of Fisma’s pre-legislative impact study) and most of them did.”

Lueder himself told WatersTechnology in August that the European Commission was working on the legislative reforms necessary to facilitate the provision of a CT across several asset classes, including bonds.

Asked at the time if he was aware of the consortium between the three venue operators, he said: “We welcome all initiatives taken in anticipation of the new rules but are not in a position to comment on individual ones.”