Europe’s Consolidated Tape: Reality or Pipedream?

While the European Parliament has finally voted its support for the new version of the Markets in Financial Instruments Directive (MiFID), one of its most controversial goals — establishing a central source of post-trade prices from regulated markets — is still far from fruition.

The new MiFID mandate may include some stepping-stone dates, but the language of MiFID II doesn’t even indicate a specific timetable for when a consolidated tape must be launched. The message to market participants who want and need the consolidated tape is “don’t hold your breath.”

The European Commission, Parliament, and Council of Ministers are set to sign off on Level 1– or conceptual language — of MiFID II,  to be presented by the European Securities and Markets Authority (ESMA) in June. Members of the European Union have another two years to transpose the legislation into their local laws. The content of Level 2 — the more technical details such as authorization for local regulators to endorse consolidated tape operators — are expected to be ironed out over the next 12 to 18 months.

This sounds like progress, however slow, but just how the consolidated tape can be offered at “reasonable” pricetag and for whom — remains unsolved.  “There is still debate over what the European Commission means by reasonable cost for usage rights to the consolidated tape,” says Anne Plested, head of European regulation change in Europe for order management and trade execution provider Fidessa in London.

Here is what MiFID is all about and why a consolidated tape is so critical to the EC’s goals. As an ambitious, investor-protection initiative, MiFID  has, so far, involved changing the fundamental landscape of trading venues available to investors. No longer do they have to be beholden to mega exchanges, and with the number of trading venues expected to grow as MiFID II brings dark pools and firms’ internal crossing activities under its authority, so does the complexity of tracking market activity.

Broker-dealers and banks are responsible for meeting best execution standards — providing the most advantageous transaction in terms of total explicit and implicit costs to investors. But to do so, they need sufficient data to show their customers the prices at which they bought and sold shares compared with other deals executed on different exchanges and alternative trading venues. Without mandated common standards for tagging, formatting and identifiers, the venues may provide value for their own paying user members, but present a dilemma for any firm looking to consolidate the market data from multiple markets. Data accuracy from the venues, or the resellers of market data, has also come into question.

Being able to prove best execution to investors and regulators is a far easier task in the US which runs a consolidated tape, including not only post-trade but also pre-trade prices, through the National Market System overseen by the Securities and Exchange Commission. There appears to be no equivalent regulatory body, stepping up to the plate in Europe to set standards, commercial terms and access. While ESMA can provide broad guidelines, local regulators have lot of leeway to make their own decisions, bemoan data management specialists.

Data vendors Thomson Reuters, Bloomberg, and Interactive Data each offer proprietary versions of European consolidated tapes, but they differ on the level of details provided and data tags, say fund managers. Market players — particularly buy-side firms — also complain that all of the data providers, including exchanges, are charging too much for their datafeeds. A consolidated tape would bring down access fees for market data. Or that’s the argument on which the European regulators were brought into the consolidated tape issue.

Enter the EC’s version of how a consolidated tape would work: approved publication arrangements (APRs) would send real-time data streams from exchanges and alternative trading venues such as multilateral trading facilities to accredited consolidated tape providers (CTPs). Those providers would make the exact same information using the exact same data tags and formats available to the public at so-called reasonable cost. Based on how MiFiD II is written, the EC has finally settled on using multiple competing CTPs, but it has indicated it will select a single CTP if multiple providers do not step up.

It all sounds great, but with the exact price to be charged and terms of access yet to be defined, it appears that no one is eager to take on the role of CTP, note European fund operations specialists who spoke with FinOps Report. Commercial data vendors are in business to make money and, if they are required to charge “reasonable” rates under the MiFID regime, don’t have much motivation to volunteer or even support an idea that will surely cannibalize their existing services.

Just what does making data available to the public really mean? asks Reg Pritchard, chief executive officer of Rights Management Associates, a London-based data licensing specialist. Does the phrase “public” apply to the retail investor on the Street, or does it include market participants executing orders on lit and dark pools? And does the phrase “make available” mean that index creators, traders of contracts for difference, and spread-betting firms can obtain consolidated tape data at restricted cost and do what they want with it? Will ESMA’s guidance on commercial terms be limited to the use of the tape data by retail investors and market participants for trading purposes only?

“The use of data for trading purposes is the biggest and most sensitive issue for a small number of European exchanges because they have evolved ways of making sure their own member firms can have free access to their market data provided it is used only for trading on the exchanges,” says Pritchard. “MTFs can and do argue this is an abuse of dominant position under the EU’s competition law.”

Bottom line: the debate about the need to lower the cost of market data fees may a bit overblown. It ignores the fact that the big market players generating the overwhelming bulk of trades already have access to data from exchanges across the European Union for free or at a big discount as long as they use it to trade only on the exchange’s own platform, says Pritchard.

Resistance by data sources and vendors appears to have helped blocked a previous attempt at a consolidated tape. The COBA project was released with much fanfare in November 2012 after the FIX Trading Community provided a set of guidelines for how trade reports and market data should be consolidated. The initiative had also come up with a revenue allocation plan similar to how the consolidated tape is run in the US., but within three months, it was unceremoniously shut down, citing a lack of support. One of its co-founders Mark Schaedel, former global head of market data for NYSE Euronext, is now managing director of equities for Markit in London. FIX Trading Community and Markit wouldn’t comment for this article.

If the EC and ESMA don’t step up to the plate to force the issue of data standards, decide the restrictions of access to the consolidated tape, provide a pricing formula that provides some level of fairness to the data sources and vendors, and face the fact that the consolidated tape is one more issue that is going to reshape that business of the markets, it will be a long time before Europe finally has the consolidated market data that the US takes for granted.