A European Consolidated Tape: How Much Longer Must We Wait?

European equity brokers face a number of challenges during the current ‘interim’ between the original MiFID Directive of 2007 and its MiFID 2 successor. And the interim period is unfortunately becoming steadily longer as debate on the details of MiFID 2 and MiFIR grinds on, with implementation unlikely before 2015, at the earliest. Recent progress by EU governments still leaves open several points of contention with the Parliament.

In the meantime, we have to live with a market structure that is at least partly dysfunctional: MiFID 1 achieved its objective of creating competition among trading and clearing venues, but it failed to provide the transparency that market participants need. This transparency is vital if buy-side firms are to take proper advantage of the new competitive landscape, and for measurement of their brokers’ trading performance against MiFID’s ‘Best Execution’ standard. The need for a consolidated tape, like the one that is long-established in the U.S. market, remains paramount: This tape needs to carry basic transaction data from all trading venues, plus OTC trade reports, in a standard format and at an affordable price.

There are other unsatisfactory aspects of the current “between MiFIDs” market environment, but the priorities and prescriptions of the various interested parties vary widely. These differing views are of course the main cause of the delays in the drafting and discussion of MiFID 2. So it’s regrettable that the one vital prescription on which virtually everyone can agree – the consolidated tape, delivering affordable market transparency – is delayed while the other complexities are debated.

To make matters worse, although the consolidated tape proposal is clearly laid out in all MiFID 2 drafts, it is not clear how the final Directive will make this a reality quickly. There will be a period of up to two years during which satisfactory commercial solutions may or may not appear, at which point the European Commission and ESMA will review and, if necessary, contract with a provider on an exclusive utility basis.

Of course, it can be argued that if the tape is so desirable, someone should just make it happen – who needs a Directive? But this has been tried already: Earlier this year we saw the abandonment of the well-sponsored COBA project. “Given the distance that’s left between the different positions, we are suspending the project,” said managing partner Mark Schaedel. “We don’t have enough support.”

While the technical and data standardization challenges for any consolidated tape provider will be considerable, they can almost certainly be overcome. But COBA’s setback shows that the commercial issues will be even more difficult – what price should be charged for the data, and how should revenues be shared between the originators? The threat to some existing business models, particularly those of the established exchanges, is large, and resolution of the inevitable conflicts will almost certainly require ESMA’s direct involvement. It is now unlikely that a commercial solution will appear of its own accord.

So unless market participants are prepared to wait several more years  (at least) for basic enabling data that many argue they should have had since 2007, it would be desirable to separate the consolidated tape requirement from the rest of MiFID 2, and launch the necessary regulatory process for its delivery immediately. There are many lobby groups active in the MiFID context; maybe it’s time for a “tape now, please” group to make its voice heard.