Data Consolidation: what are we really talking about?
The way data is produced, exchanged and consumed is changing rapidly due to digitization and the rapid advances in technology that we are currently experiencing. For instance, while a primary use was once visual i.e. data displayed on screens for traders to interpret and act on, non-visual usage of data by machines is now becoming the norm. And this trend is likely to continue accelerating for some time.
Alongside this, we are also seeing other significant trends that are changing the way exchange data is used. For example, the growth in Systematic Internalisers (SIs) in the wake of MiFID II, going from around five SIs pre-MiFID II to approximately 216 at the end of 2019. These institutions use exchange data for execution at mid-point at the expense of the exchanges providing the data in the first place. We consider this to be an un-level playing field, especially when exchange's competitors are in control of the order flow.
It is for these reasons that regulatory changes in market data need to be debated not just in the context of market structure, but also considering competition between participants in this area.
The case for a consolidated tape?
This brings us to the debates surrounding proposals for an EU consolidated tape (CTP) and, more specifically, how such a CTP would be funded and what the impact would be on exchanges that are key in terms of the data and price formation function.
In terms of its funding, there are several proposals currently on the table. It has been suggested that EU taxpayers foot the bill for a bond CTP while trading venues and APAs fund the establishment and operation on an equity CTP. Yet what these suggestions seem to imply is that the business case for a CTP is weak; why should the taxpayer pick up the bill? These suggestions also raise the question of who will ultimately benefit from the establishment of the CTP. And what the impact would be on trading venues who would be expected to provide the data for free while being denied the opportunity to compete for order flow on a level playing field?
We thus find that, alongside there being no strong regulatory case for a CTP, there are also serious questions to be answered about its potential impact in terms of fair competition.
The “democratization” of market data
Democratizing market data is an important issue that is currently receiving a great deal of attention. Yet the issue is sometimes not yet well understood or, at least, is in need of greater explanation and clarification. Taking the markets organized by exchanges, these are already fully transparent, both to competitors and the broader public. Yet the same cannot be said for those markets organized by other market participants – investment firms and inter-dealer brokers, for instance. These markets remain opaque and, indeed, greater transparency in areas such as the trading in credit derivatives may have helped prevent the financial crisis of 2008.
So, from an exchange perspective, what does the democratization of market data really mean? It’s my view that, by providing fair price discrimination according to clearly pre-defined customer groups, democratizing data is what we currently do in our day-to-day business. And it certainly seems fair that the most intense users of data – those that derive the greatest value from it – should pick up a larger part of the bill for its production. Legislating to make data available for free, or at a very low price point, for all users – retail investors and institutions alike – regardless of the value they can extract from it, has nothing to do with “democratizing” this data but would rather represent a significant redistribution of revenues between financial market participants.