The Stock Ticker is the beating heart of US finance – why haven’t we got one?
Andy Vicat, Rich Evans and Jake Beeman from DXC Technology comment on the lack of a European Consolidated Tape.
The European Commission’s (EC) public consultation on the review of MiFID II/MiFIR has now closed. Not surprisingly, solving the mystery of what has prevented the establishment of an EU Consolidated Tape (CT) was a top priority.
Of course, with the MiFID II/MiFIR regulatory framework in place, markets now enjoy an unprecedented level of transparency and understanding. But, there’s still plenty of room for improvement.
The EC (and before it, ESMA) insists that the introduction of a consolidated tape would further improve market transparency and drive down the ever-increasing cost of market data. But how exactly? And could it really stand the test of time like the NYSE stock ticker? How would having our own consolidated tape improve things?
Currently, the facts and figures provided by surveillance, risk and best-execution reports vary considerably, depending on the data sets to which brokers have access. A consolidated tape would address those issues. CT data could become a universal baseline; standardised and widely available, with a provision for brokers to add value via extra sources (for an additional cost), if necessary. As in the United States, the CT should sit alongside market data providers, not replace them.
The buy-side is obliged to evidence best-execution to their end-investors (eg pension providers). This is limited by both the number of venues their broker has, and the European Best Bid and Offer (EBBO) validity on trades. A CT would enable them to detail their performance, precisely, against a universal benchmark.
On seeing the advantages, end-investors would pressurise brokers to use the CT as part of their best-execution reporting. A similar thing exists now, but because brokers choose the data sources themselves, the process is undermined by the lack of an independent voice. A CT would unify the market views of broker and client, by basing best-execution on the tape.
Data provided via a CT would allow building of algorithms to be more widespread across the industry leading to increased competition as it would allow smaller players to access standardised datasets without the need to employ large data science teams to clean and normalise multiple data sources. Conformance testing is a similar scenario. CT data would allow the wider market to test more accurately and gauge what impact they might have on an increasingly electronic market.
Transaction-cost analysis (TCA) reports are only as good as the benchmark data used to compile them. A CT would enable real-time visibility across the whole market (not simply the resources a broker has access to). Also, execution-routing decisions are based on the liquidity to which the Smart Order Router (SOR) has access. A CT could allow the SOR to be adjusted to reflect venue liquidity as well as allowing the broker to be aware of new liquidity, both of which would improve execution quality and transparency.
Why hasn’t a consolidated tape already emerged?
Here are five potential stumbling blocks:
1. There’s little commercial incentive to create a tape within the current regulations and, even if there were, the format for data submitted to the CT has yet to be agreed
2. Developing a reasonably-priced tape is not in the exchanges’ interest. They’re looking to monetise their market data and complex contracts must be completed before the data can be accessed.
3. Data quality issues, particularly for OTC transactions and from Systematic Internalisers. However, there are technological solutions to these data quality problems which, if backed by EC or ESMA governance, could rapidly improve data quality
4. Unless regulations are changed, building, implementing and then marketing a tape – with no guaranteed customer uptake and, potentially, vying with non-regulated competitors like market data providers – would represent considerable risk for a consolidated tape provider (CTP)
5. The complexity and lack of uniformity for accessing market data under current contract conditions, mean commercial negotiations would be expensive and time consuming. And failure to agree a single contract would result in failure to secure data for the whole-of-market
What about the likely scope of an EU tape?
As an independent global technology provider with extensive Capital Markets experience, DXC believes the benefits of having a real-time consolidated feed rather than an end-of-day feed, far outweigh the modest increase in cost. Especially if this data is provided on a transparent and reasonable commercial basis (eg: by competitive tender). With collectors in every location, latency would be in single-digit milliseconds (ms) for most sites, and standardised for delivery across the EU at around 200ms. This would be more than adequate for use cases outside high-speed trading. The cost difference of achieving this against delivering latency of something like 20sec, is nominal.
Full coverage is essential. Clearly, any data excluded from the tape will result in unequal access to data and less transparency – both of which, are explicit aims of the MiFID framework. To support this, exchanges and approved publication arrangements (APAs) must be mandated to contribute quality data to the consolidated tape, otherwise, some parties will lack the motivation to contribute. Regulation should not extend to mandating consumption but, if priced right, the market will recognise the commercial value of a CT.
Covering all asset classes
The arguments for transparency and equal data access that apply to equities, apply to other asset classes, too. In fact, a consolidated tape could be even more important for things like credit-default swaps, as there is less information currently available.
A tape that covers all asset classes should be prioritised according to the level of transparency, the notional value of trades and the existence of retail. Our top-four ranking (No1 being the earliest phase) would be as follows:
Balancing cost and benefit
Post-trade is technically straightforward to deliver and could be implemented quickly. Pre-trade is more complex – depending on the depth of book included – and would take slightly longer to implement. Depth of book should be limited to maintain a balance between the benefits and running costs of the CT. This would allow existing market data providers to continue servicing specialised use cases that warrant its purchase.
As active members of the FIX Trading Community, and following the work done on extending the market model typology (MMT) data specification for the CT, we support its acceptance. Data specifications for the other asset classes should also be defined by industry-body-led working groups.
Could an EU consolidated tape work in a commercial sense?
Pitching the cost of CT consumption is critical, not just for earning user approval but also for driving down the general cost of market data. The price needs to reflect a “reasonable commercial return” for the CTP, exchanges and APAs, and no more.
There are two components for CT pricing:
1. The cost of producing the CT incurred by the CTP (consume, normalise, etc.). This is settled by open and competitive CTP outsourcing
2. The cost passed back to the originators of the data (exchanges, APA). This is more complex, but independent IT companies in other sectors can help define what a “reasonable commercial return” might be
Independent technology companies have a wealth of experience in producing, verifying, storing and making data available across a wide range of industries, and could prove useful in comparing the cost of market data in Capital Markets.
Preferred business model
In our preferred CT model, the CTP charges users a flat fee for consumption. All surplus revenue (after CTP-fee deduction) is passed to the trading venues and APAs. This will be allocated by the CTP according to business rules defined by the regulator.
The level of return should reflect the usefulness of the data. The development of business rules to frame this condition will be key to preventing unintended behaviors. Importantly, CTP revenue should be protected (subject to SLAs), regardless of the uptake in CT consumption. Otherwise, many commercial parties will lose interest and the cost of bearing the risk will represent a significant price increase to the regulator.
One provider for each asset class, or one for all?
Allowing one CTP for each asset class reduces the level of investment a commercial partner can commit to building and maintaining the infrastructure. Also, it would be harder to maintain standards and service, plus, having multiple providers makes governance more challenging and expensive. Clearly, the advantages of having a single CTP covering all asset types are many and various.
We believe that the role of CTP should be competitively tendered every 10 years. This would ensure the tape is delivered on a reasonable, commercial basis, while making sure the EC has a commercial partner that can operate at scale without overly complex governance.
Time for action
The technology to implement a consolidated tape for equities already exists and most key stakeholders are ready to act on that understanding.
Having been actively engaged in the public consultation on MiFID II/MiFIR, DXC would like to see the European Commission publish a clear roadmap for CT implementation, partnering with strategic stakeholders and amending the existing regulatory framework where necessary. In due course, we would be delighted to continue to help the Commission and ESMA determine how CT deployment would work from a technical standpoint.
Listening to and managing stakeholders will be central to the success of a CT. So, we’re advocating the formation of an independent advisory board to bring exchanges, brokers, buy-side, vendors and regulators together within a framework, to work with the future CTP to resolve any implementation issues.
DXC is an independent, end-to-end IT services company, and has a USD20 billion annual revenue. Its subsidiary, Fixnetix, provides global connectivity to a wide range of venues and exchanges through an ultra-low latency infrastructure, which comprises over 40 data centres and provides access to over 90 key liquidity venues.