Unifying Market Data: Consolidated Tape Providers in the EU & US

In the fast-paced world of financial markets, access to timely and comprehensive market data is crucial for investors, regulators, and market participants alike. Consolidated tape, a centralised system for disseminating real-time trading information, has emerged as a solution to address the fragmented nature of market data. This article explores the concept of consolidated tape, delving into its advantages and examining its status in both the U.S. and the European Union.

In essence, a consolidated tape aggregates data from various trading venues, providing a single source of information on trading activity across multiple markets. By consolidating fragmented market data into a unified feed, consolidated tape aims to enhance transparency, improve market efficiency, and facilitate fair and orderly trading. Investors benefit from access to a comprehensive view of market activity, enabling informed decision-making and price discovery. Regulators also gain greater visibility into market dynamics, enabling more effective oversight and surveillance.

However, the implementation of a consolidated tape system has encountered challenges on both sides of the Atlantic. In the EU, efforts to establish a consolidated tape have been met with resistance from exchanges and market participants, citing concerns over cost, competition, and data ownership. Whilst in the US, despite there being regulatory initiatives such as the Securities Information Processor (SIP) and the Trade Reporting and Compliance Engine (TRACE), which provide consolidated data for U.S. equity markets and over-the-counter (OTC) debt securities respectively, debates persist over the need for a more robust and inclusive consolidated tape solution.

In contrast, the EU has made significant strides towards implementing a consolidated tape as part of its broader regulatory framework for financial markets. The Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) provide a legislative framework for the creation of consolidated tapes for equity and non-equity instruments, aimed at promoting transparency and fostering competition among trading venues. However, challenges remain in harmonising data standards, ensuring data quality, and addressing concerns over access and pricing.

Against this backdrop, this article examines the advantages of consolidated tape in promoting market transparency, liquidity, and investor confidence. It also analyses the status of consolidated tape initiatives in the U.S. and the EU, exploring regulatory developments, industry trends, and ongoing debates surrounding its implementation. By shedding light on the benefits and challenges of consolidated tape, this article aims to contribute to the discourse on market structure and regulatory reform in global financial markets.

•  Background and the State of Play within the US

The inception of the National Market System (NMS) in 1975 stands as a watershed moment in the transformation of secondary market trading within the U.S. Through amendments to the Securities Exchange Act of 1934, regulators, led by the Securities and Exchange Commission (SEC), sought to address systemic inefficiencies and enhance market transparency by instituting sweeping reforms. Central to these reforms were the Market Data Rules, which underscored the imperative of establishing a centralised repository for market data to consolidate the best bids and offers across the nation.

Responding to these demands, the Consolidated Tape Association (CTA) emerged as the pioneering force behind data consolidation, driving the creation of both the Consolidated Tape System (CTS) and the Consolidated Quote System (CQS) data streams. These endeavours collectively laid the foundation for what would later be recognised as Securities Information Processors (SIPs) or Consolidated Tape Providers (CTPs) – pivotal conduits for compiling and disseminating quotes and last sale information for designated NMS stocks and securities. Meanwhile, TRACE serves as the central hub for consolidating transaction data across eligible corporate bonds, offering real-time accessibility to retail and institutional investors as well as market professionals. This accessibility is made possible by the diligent reporting of transaction information by FINRA members on OTC activity in corporate bonds. Notably, the TRACE program has been expanded to encompass reporting on transactions involving U.S. agency debentures, asset-backed securities (ABS), and mortgage-backed securities (MBS). However, it's essential to note that while transaction data for U.S. Treasury securities is reported to TRACE, this information remains inaccessible to the public.

In US securities markets, quotes and last sale information is consolidated for designated NMS stocks and securities under NMS Plans. By rule each broker-dealer and Alternative Trading System (‘ATS’) is required to submit data to information processors governed by NMS Plans for inclusion in the consolidated tape. Market makers and ATSs exceeding certain volume thresholds must likewise submit quotations or certain best priced orders for consolidation in a National Best Bid and Offer (‘NBBO’) and provide execution access to such quotations or orders through a trading facility operated by an SRO. The US CTP therefore covers pre- and post-trade data for all listed securities (equities and bonds), and data must be reported regardless of the execution venue (on or off-exchange)

Yet, despite the implementation of regulatory mechanisms like the SIP, persistent challenges loom over the efficacy and indispensability of CTP. Ongoing debates centre on its capacity to address entrenched issues of market fragmentation, data accessibility, and the integrity of consolidated information. While the SIP endeavours to facilitate the consolidation of market data, concerns persist regarding its ability to furnish accurate and timely information to market participants.

However, proponents of the CTP contend that it has been pivotal in fostering growth, innovation, and competition within the US securities markets. The SEC lauds the transformative impact of the NMS and CTP initiatives, citing a surge in trading volume and a precipitous decline in investor trading costs as tangible outcomes of these regulatory reforms. Despite the ongoing discourse surrounding the CTP, its indispensable contributions to market efficiency and investor welfare underscore the imperative of continued deliberation and vigilant regulatory oversight in shaping the trajectory of market data consolidation in the U.S.

• The EU’s Attempt

In 2010, the European Commission unveiled its vision to establish a Consolidated Tape (CT) across the EU, taking cues from the successful model implemented in the U.S. This initiative was introduced within the context of the Markets in Financial Instruments Directive (MiFID), the cornerstone legislation governing secondary markets in the EU. The Commission's proposal aimed at enhancing market transparency and efficiency by consolidating trade data, thereby improving its quality, consistency, and accessibility for investors. The regulatory objectives of the proposed CT were multifaceted, including the consolidation of market data across the EU, mitigation of market fragmentation, and enhancement of data quality and availability.

The European Commission outlined three potential options for establishing the CT. Option 1 mirrored the US model, mandating a formal consolidated tape operated by a non-profit entity appointed through legal means. Option 2 proposed a similar approach but allowed for the operation of the consolidated tape by a commercial entity selected through a public tender process. Option 3 introduced competition among commercial providers, prescribing conditions for CT provision under MiFID while permitting multiple entities to offer consolidated tape services.

Ultimately, Option 3 emerged as the preferred choice and was incorporated into MiFID II. However, unlike the US model, the European Commission opted not to mandate a pre-trade transparency CT due to significant market differences. MiFID II emphasised the importance of a CT in bolstering competition among trading venues, particularly in the equities markets, to reduce trading fees and enhance market liquidity. However, challenges emerged during implementation, particularly in the non-equity markets, which encompassed derivatives and bonds.

Despite efforts to implement a Union-wide CT, challenges arose, primarily due to the complexity of market data quality and licensing policies imposed by data suppliers. The multitude of data contributors across the EU, each with their own proprietary data feeds and reporting standards, presented significant hurdles. Complex market data licensing structures, varying pricing tiers, and compliance requirements further compounded the challenges, dampening commercial incentives for entities to pursue authorisation as a Consolidated Tape Provider (CTP).

In essence, while the EU endeavoured to emulate the success of the US consolidated tape model, the journey toward establishing a CT faced formidable obstacles, ultimately resulting in an unsuccessful attempt under MiFID II. Despite regulatory ambitions, the complexity of market dynamics and data infrastructure posed formidable challenges that underscored the divergent paths taken by the EU and the US in their approaches to market data consolidation.

• The 2024 MiFIR Review

The MiFIR Review stands as a critical juncture in the EU's journey towards establishing a CTP, aimed at surmounting the myriad challenges impacting market data consolidation within the region. Rooted in the overarching goal of fostering a robust and commercially viable environment, the review seeks to untangle the complexities surrounding the procurement and harmonisation of market data, thereby paving the way for the seamless operation of a consolidated tape.

Central to the revised framework is the mandate for Data Contributors, encompassing Trading Venues and Approved Publication Arrangements, to transmit regulatory data to the CTP's data centre in near real-time. Emphasising standardised formats and resilient transmission protocols, this directive underscores the EU's commitment to ensuring the dissemination of high-quality market data, indispensable for informed decision-making by market participants.

However, amidst the push towards data standardisation lies the conundrum of proprietary market data—a crucial revenue stream for exchanges, particularly those with limited trading volumes or listings. To address this, the MiFIR Review introduces tailored exemptions for smaller regulated markets and SME Growth Markets, coupled with an opt-in mechanism designed to incentivise their participation in the consolidated tape ecosystem. This strategic approach not only promotes market inclusivity but also bolsters the EU's overarching vision of a unified and resilient Capital Markets Union.

Furthermore, the MiFIR Review delineates a comprehensive revenue redistribution scheme, prioritising small regulated markets and incentivising data contributors facilitating market liquidity and price discovery. By aligning incentives with broader market objectives, this scheme aims to cultivate a symbiotic relationship between data contributors and the consolidated tape framework, ensuring its sustainability and efficacy in the long run.

Moreover, the review underscores the EU's commitment to transparency and investor protection by advocating for the consolidation of both pre-trade and post-trade data for shares and ETFs—a move reflective of global best practices and in line with developments in the U.S. However, recognising the nuanced dynamics of bond and OTC derivative markets, the EU opts for a phased approach, focusing initially on post-trade data consolidation while laying the groundwork for future expansion into pre-trade transparency. Finally, in addition to these improved conditions, the MiFIR review grants ESMA the responsibility to select the most suitable provider to operate each of the three CT, for bonds, for equities (shares and ETFs) and for OTC derivatives. This new responsibility is in congruence with the transfers of authorisation and supervision powers from NCAs to ESMA in the ESAs review.

In essence, the MiFIR Review represents a watershed moment in the EU's regulatory landscape, signifying a concerted effort to overcome obstacles and realize the vision of a truly integrated and resilient capital market ecosystem. By fostering collaboration, incentivising participation, and prioritising transparency, the review sets the stage for a new era of market efficiency, liquidity, and investor confidence within the EU.

• Conclusion 

The MiFIR Review stands as a crucial step in Europe's quest to overcome historical barriers hindering the adoption of consolidated tapes within its market landscape. However, lingering questions persist regarding the viability of the EU's consolidated tape framework amidst the continued value of proprietary data sales by trading venues. In comparison to the U.S., where the SIP provides consolidated data for equity markets, the EU's journey towards a unified tape has encountered unique challenges. The commercial viability of the non-equity tape (or tapes) remains an area which is yet to evolve. In addition to the prior remarks set forward in this paper, a specific key area of concern for the Fixed Income and Derivatives CTP (or CTPs) is that the EU already has APAs which publish (decentralised) market data for free within 15 minutes. Even though a single CTP (or two CTPs) in this area would be able to publish a single source of information, the economic viability for such CTPs is still questionable, mainly since:

1. A 15-minute delay is not material especially for fixed income markets given the relatively low trading volumes as opposed to the equity markets. One can argue that there is little technical advantage towards using the CTP’s real-time information over the existing free 15-minute delayed data;

2. CTPs will face regulatory oversight, obligating them to adhere to the regulatory standards set forth by MiFID II and/or MiFIR, inevitably incurring costs that must be recovered. It's conceivable that third-party vendors may emerge in this sector, aggregating the freely available data for various distinct business purposes while taking advantage of the regulatory framework established for CTPs. They may offer more attractive fees compared to the CTPs, potentially capitalising on regulatory compliance efforts already undertaken by the CTPs.

While the MiFIR Review endeavors to tackle various obstacles, such as latency issues and enhancing investor access, the extent to which European trading venues will wholeheartedly embrace the transition to a consolidated data environment is yet uncertain. As the EU navigates towards establishing a unified live data ecosystem, the trajectory ahead is closely linked with resolving these pivotal uncertainties, which will ultimately mold the landscape of market transparency and investor trust across the region. Additionally, it presents an opportune moment to gauge whether the innovative provision of a centralised data point for derivative trading proves advantageous, potentially inspiring other jurisdictions to emulate the EU's pioneering approach.