Since the implementation Mifid1 in 2007, there has been a lot of talk about a pan-European consolidated tape, whether it would benefit the market, how it might operate and why it has not come about without regulatory pressure.
Post 2007 when stocks when allowed to trade on multiple exchanges, market participants who wanted to see the full history and market for a stock have to subscribe to multiple sources of data – essentially the individual ticker tapes for each venue in which
that stock now trades. A bit like shopping for flights before sky-scanner and other aggregators of data appeared in our lives, except to access each underlying source of stock data you have to pay a fee. This increased the cost of accessing the full picture
of the stocks liquidity and history of trading.
Understandably many have not been happy about this cost increase, and have been petitioning for a “consolidated tape” (CT). The intent of a CT being that the venues would have to provide the data to a CT provider at a reasonable commercial basis, the CT
provider would aggregate it, and provide a single source for the market. The market would get cheaper solution and a standardised “Tape” for comparison purposes such as transaction cost analysis and algorithmic calibration.
ESMA recently consulted on the subject of a CT, and DXC responded – DXC’s Fixnetix business already accesses the majority of the venues in question and has the capability to build and run the CT.
The European Commission’s (EC) public consultation on
the review of MiFID II/MiFIR has now closed. Not surprisingly, solving the mystery of what has prevented the establishment of an EU consolidated tape (CT) was a top priority.
Of course, with the MiFID II/MiFIR regulatory framework in place, markets now enjoy an unprecedented level of transparency and understanding. But, there’s still plenty of room for improvement.
“After nearly 2 years of operating under MiFID II, we’re still lacking a reliable view of liquidity across
Steven Maijoor, Chair, European Securities and Markets Authority (ESMA)
The EC (and before it, ESMA) insists that the introduction of a consolidated tape would further improve market transparency and drive down the ever-increasing cost of market data. But how exactly? And could it really stand the test of time like the NYSE stock
How Would Having Our Own Consolidated Tape Improve Things?
Currently, the facts and figures provided by surveillance, risk and best-execution reports vary considerably, depending on the data sets to which brokers have access. A consolidated tape would address those issues. CT data could become a universal baseline;
standardized and widely available, with a provision for brokers to add value via extra sources (for an additional cost), if necessary. As in the U.S., the CT should sit alongside market data providers, not replace them.
The buy-side is obliged to evidence best-execution to their end-investors (e.g., pension providers). This is limited by both the number of venues their broker has, and the European Best Bid and Offer (EBBO) validity on trades. A CT would enable them to detail
their performance, precisely, against a universal benchmark.
On seeing the advantages, end-investors would pressurize brokers to use the CT as part of their best-execution reporting. A similar thing exists now, but because brokers choose the data sources themselves, the process is undermined by the lack of an independent
voice. A CT would unify the market views of broker and client, by basing best-execution on the tape.
Added Accuracy, Flexibility and Transparency
Data provided via a CT would allow building of algorithms to be more widespread across the industry leading to increased competition, enabling smaller players to access standardized data sets without the need to employ large data science teams to clean and
normalize multiple data sources. Conformance testing is a similar scenario. CT data would allow the wider market to test more accurately and gauge what impact they might have on an increasingly electronic market.
Transaction-cost analysis (TCA) reports are only as good as the benchmark data used to compile them. A CT would enable real-time visibility across the whole market (not simply the resources a broker has access to). Also, execution-routing decisions are based
on the liquidity to which the smart order router (SOR) has access. A CT could allow the SOR to be adjusted to reflect venue liquidity as well as allowing the broker to be aware of new liquidity, both of which would improve execution quality and transparency.
Why Hasn’t a Consolidated Tape Already Emerged?
Here are five potential stumbling blocks:
- There’s little commercial incentive to create a tape within the current regulations and, even if there were, the format for data submitted to the CT has yet to be agreed.
- Developing a reasonably priced tape is not in the exchanges’ interest. They’re looking to monetize their market data, and complex contracts must be completed before the data can be accessed.
- Data quality issues, particularly for OTC transactions and from Systematic Internalizers. However, there are technological solutions to these data quality problems which, if backed by EC or ESMA governance, could rapidly improve data quality.
- Unless regulations are changed, building, implementing and then marketing a tape – with no guaranteed customer uptake and, potentially, vying with non-regulated competitors like market data providers – would represent considerable risk for a consolidated
tape provider (CTP).
- The complexity and lack of uniformity for accessing market data under current contract conditions, mean commercial negotiations would be expensive and time consuming. And failure to agree a single contract would result in failure to secure data for the
What about the Likely Scope of an EU Tape?
As an independent global technology provider with extensive Capital Markets experience, DXC believes the benefits of having a real-time consolidated feed rather than an end-of-day feed, far outweigh the modest increase in cost. Especially if this data is provided
on a transparent and reasonable commercial basis (e.g., by competitive tender). With collectors in every location, latency would be in single-digit milliseconds (ms) for most sites, and standardized for delivery across the EU at around 200 ms. This would be
more than adequate for use cases outside high-speed trading. The cost difference of achieving this against delivering latency of something like 20 sec, is nominal.
Full coverage is essential. Clearly, any data excluded from the tape will result in unequal access to data and less transparency – both of which are explicit aims of the MiFID framework. To support this, exchanges and approved publication arrangements (APAs)
must be mandated to contribute quality data to the consolidated tape; otherwise, some parties will lack the motivation to contribute. Regulation should not extend to mandating consumption but, if priced right, the market will recognize the commercial value
of a CT.
Covering All Asset Classes
The arguments for transparency and equal data access that apply to equities, apply to other asset classes, too. In fact, a consolidated tape could be even more important for things like credit-default swaps, as there is less information currently available.
A tape that covers all asset classes should be prioritized according to the level of transparency, the notional value of trades and the existence of retail. Our top-four ranking (#1 being the earliest phase) would be as follows:
Balancing Cost and Benefit
Post-trade is technically straightforward to deliver and could be implemented quickly. Pre-trade is more complex – depending on the depth of book included – and would take slightly longer to implement. Depth of book should be limited to maintain a balance between
the benefits and running costs of the CT. This would allow existing market data providers to continue servicing specialized use cases that warrant its purchase.
As active members of the FIX Trading Community, and following the work done on extending the market model typology (MMT) data specification for the CT, we support its acceptance. Data specifications for the other asset classes should also be defined by industry-body-led
Could an EU Consolidated Tape Work in a Commercial Sense?
Pitching the cost of CT consumption is critical, not just for earning user approval but also for driving down the general cost of market data. The price needs to reflect a “reasonable commercial return” for the CTP, exchanges and APAs, and no more.
There are two components for CT pricing:
- The cost of producing the CT incurred by the CTP (consume, normalize, etc.). This is settled by open and competitive CTP outsourcing.
- The cost passed back to the originators of the data (exchanges, APA). This is more complex, but independent IT companies in other sectors can help define what a “reasonable commercial return” might be.
Independent technology companies have a wealth of experience in producing, verifying, storing and making data available across a wide range of industries, and could prove useful in comparing the cost of market data in Capital Markets.
Preferred Business Model
In our preferred CT model, the CTP charges users a flat fee for consumption. All surplus revenue (after CTP-fee deduction) is passed to the trading venues and APAs. This will be allocated by the CTP according to business rules defined by the regulator.
The level of return should reflect the usefulness of the data. The development of business rules to frame this condition will be key to preventing unintended behaviors. Importantly, CTP revenue should be protected (subject to SLAs), regardless of the uptake
in CT consumption. Otherwise, many commercial parties will lose interest and the cost of bearing the risk will represent a significant price increase to the regulator.
One Provider for Each Asset Class, or One for All?
Allowing one CTP for each asset class reduces the level of investment a commercial partner can commit to building and maintaining the infrastructure. Also, it would be harder to maintain standards and service, plus, having multiple providers makes governance
more challenging and expensive. Clearly, the advantages of having a single CTP covering all asset types are many and various.
We believe that the role of CTP should be competitively tendered every 10 years. This would ensure the tape is delivered on a reasonable, commercial basis, while making sure the EC has a commercial partner that can operate at scale without overly complex governance.
Independence Is One of Our Greatest Assets
The combination of world-class IT with scale and deep experience of Capital Markets gives DXC Technology a unique perspective on this issue, which we’re able to offer without any conflict of interest.
DXC is the world’s leading independent, end-to-end IT services company, and has a $20 billion annual revenue. Our subsidiary, Fixnetix, provides global connectivity to a wide range of venues and exchanges through an ultra-low latency infrastructure, which comprises
over 40 data centers and provides access to over 90 key liquidity venues.
Time for Action
The technology to implement a consolidated tape for equities already exists and most key stakeholders are ready to act on that understanding.
Having been actively engaged in the public consultation on MiFID II/MiFIR, DXC would like to see the European Commission publish a clear roadmap for CT implementation, partnering with strategic stakeholders and amending the existing regulatory framework where
necessary. In due course, we would be delighted to continue to help the Commission and ESMA determine how CT deployment would work from a technical standpoint.
Listening to and managing stakeholders will be central to the success of a CT. So, we’re advocating the formation of an independent advisory board to bring exchanges, brokers, buy-side, vendors and regulators together within a framework, to work with the future
CTP to resolve any implementation issues.
If you’d like to discuss the future of an EU consolidated tape further, please reach out to Andy at firstname.lastname@example.org or Rich Evans email@example.com