MiFID/MiFIR 2 envisages the creation of a regulated Consolidated Tape (CT) in Europe. In simple terms a CT is expected to provide a standardized view over multiple fragmented liquidity pools contributing to the price formation for a defined universe of securities. Since MiFID/MiFIR was implemented in early 2018 there has been no commercially viable providers entering this space. Even among the existing commercial providers, who have a great deal of experience in this area, we saw little appetite for becoming a regulated CT operator.
Due to this lack of industry initiative, the EU Commission (DG FISMA) is currently working on alternative proposals designed to deliver a regulatory solution for an EU CT. A UK-based consultancy firm, Market Structure Partners (MSP), was mandated to assess the CT use cases and submitted proposals on how the future EU CT Setup should preferably look like. The EU Commission published the Study on the Creation of an EU Consolidated Tape in October 2020.
Current shape of the Market Data Value Chain
Real-time quotes and trade data represent the indispensable raw material needed to secure market transparency. Alongside the market data value chain, we usually distinguish three groups of stakeholders with specific roles:
Data Producers: Trading Venues, Systematic Internalisers, brokers reporting OTC trades
Data Aggregators/Distributors: Commercial Data Vendors, Approved Publication Arrangements (APA), Consolidated Tape
Data Consumers: Institutionals, Retail investors, brokers, Proprietary Trading firms, Researchers
While Data Vendors operate on a purely commercial basis, the Consolidated Tape (CT) would operate within a strictly regulated framework.
There are currently very high expectations about what benefits the EU CT should deliver. There is no silver bullet in this space. We expect some disappointment.
Considering some of the expected benefits:
Improved Trade Outcome (MSP Report # 5.2)
“…pre-trade analysis requires a complete and accurate consolidated data set. With this information, the trader or investor can forecast, and thus optimise, the expected cost and risk of the trade versus the timeframe required to complete the trade. (MSP Report, Section #5.2)”
The existence of the Consolidated Tape will not resolve the discrepancy in data quality which we see in the data sets originating from trading venues and poorer data originating from SI/OTC trade reporting flows. We are also mindful that dark liquidity offers no pre-trade transparency. A real-time CT won’t change that.
We understand that latency is a vital component of the viability of any CT. The MSP report however expects that the EU CT output latency will near some 250 milliseconds. This is a weak performance in comparison with current industry standards and would not support the current automated trading requirements in real time.
More Accurate Pricing and valuation [MSP Report #5.3]
“…Reconciliations are only as good as the data used to reconcile against. If data is poor or inaccurate then fund values could be calculated incorrectly, and differences can take weeks to resolve. (MSP Report section #5.3”
Trading Venues have the full insight over the order/trade lifecycle as well as over the performance of their systems. This guarantees the quality, consistency and low latency of the data output.
A CT, like a data vendor, is by nature located downstream in the market data value chain. It does not have control over the data creation process and will have little clue to assess whether incoming data is good or bad in terms of content and timeliness.
Slow real-time streaming equally reduces any perceived benefits which appears to result in an over-engineered and consequently expensive solution. To fulfil reconciliation purposes a much more efficient and cost-effective solution would be an End-of-Day file transfer solution.
Improved Regulatory Calculations / Policy Making [MSP Report #5.8]
“…To fulfil its supervisory obligations ESMA has to source, cleanse and manipulate significant amounts of data to make certain regulatory calculations. This requires considerable resources, effort, and time delay to complete. Alternatively, if this information were available from CT data then ESMA would not have to cleanse… (MSP Report, section #5.8)”
This use case aims at transferring some existing burdensome data processing activities from the regulator towards the CT operator. This consequently means additional operating costs that CT users will have to pay for.
Increased access to low-cost investment for savers [MSP Report #5.7]
“…The direct cost savings from CT data could potentially save end-users billions of euros but it could also bring benefits to market transparency, competition… (MSP Report, Section 5.7)”
The combined revenues from market data raised by European exchanges amounted to 245 mio EUR in 2018 (Oxera Study: The Design of Equity Trading Markets in Europe).
It is difficult to comprehend how adding an additional data aggregation layer into the existing structures would result in any significant decrease in the implicit costs of investment decisions. There is no visible metric evidencing this statement in the MSP report.
We see a few other areas which the CT will not be able to resolve:
Capturing, cleansing and normalizing billions of data points from 434 different data sources is not a trivial undertaking. It is questionable if a new provider could deliver an enhanced solution to the existing commercial vendors that can leverage decades of experience in this area.
EU Regulation MiFID/MiFIR RTS 25 prescribes different machine-time accuracy and timestamping granularity levels for different types of executions on the same securities. We consequently don’t understand how a CT could then consistently rebuild the correct sequencing of such transactions.
From a commercial perspective demanding wholesale customers are unlikely to be satisfied with the poor CT latency performance stated in the MSP report (250 milliseconds). At the other end of the consumer spectrum, retail customers already pay very low fees for consuming real-time market data and would therefore have very little incentive to switch from their current data provider towards CT services. Under such circumstances it would be difficult to make the CT commercially viable, unless there is a regulatory obligation to consume the CT output on top of existing data services.
A nearby real-time (but obviously too slow considering current latency standard) streaming solution looks overly expensive and over-engineered for the questionable benefits it will deliver. An End-of-Day Tape of records would be for sure a more adequate alternative for supporting efficient navigation across fragmented liquidity pools in Europe.