The devil is in the details—unfortunately, a lack of details is exactly what has plagued the establishment of a European consolidated tape (CT) over the last decade.

James McKeone, vice president of European data at Nasdaq, understands the theory behind a tape, and he understands a tough, ingrained problem in Europe’s market structure—deep fragmentation and a need for transparency. He says that Nasdaq was supportive of a tape, so long as it’s useful to the industry and does not increase costs. As the process has dragged on, though, he’s less convinced that a European consolidated tape would remedy those. He isn’t alone.

“We have a tape in the US, we have the technology, and we were thinking about whether we could be a part of it. But as it’s gone on, what concerns us is we keep speaking to customers, and they’re saying they don’t want it,” McKeone says.

Two years ago, Mifid II called for a consolidated tape provider (CTP) to step forward, and laid out the operational requirements and the legal framework under which it should be run. To date, no one has taken the mantle. Market participants still have many questions and concerns about the initiative, which Europe’s regulatory bodies hope to ease. On December 4, 2019, the European Securities Market Authority (Esma) issued its first review of Mifid II/Mifir, stating that the legislation’s objective to reduce market data costs had not been met. In the report, the authority recommended a real-time, pan-European consolidated tape for equity instruments.

This summer, the European Commission is expected to present its own report to the European Parliament and the European Council on the functioning of the consolidated tape for post-trade information. Meanwhile, UK-based advisory firm Market Structure Partners is conducting a study on the creation of an EU consolidated tape, which the firm expects to complete in the spring.

The questions these studies must answer aren’t highly technical, but they are important: What will the cost be? Will that cost be more or less than simply not having a consolidated tape? Should the tape cover lit markets’ equities, or over-the-counter (OTC) trades in the unregulated venues? Should the data be provided in real-time, or at end of day? Who is this really for—institutional or retail investors? And do the overall benefits outweigh the toil of the tape’s creation and operation?

Industry participants have their doubts about whether the regulators are ready to answer these tough questions.

“They think the US has got it, so if Europe doesn’t have it, that means Europe’s lagging behind the US, and that’s terrible—what must the world think of us?” McKeone says. “But they don’t stop to think that maybe we don’t have it because it’s not necessary. You don’t invent a reason, you need to find a use-case first. And we seem to be fighting a losing battle trying to explain that.”

The US consolidated tape, which was introduced in 1976, provides investors with real-time access to trade data on exchange-listed stocks, such as price and volume information. Major exchanges, like the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (Cboe), report trades and quotes through the tape. The hitch? The US has a significantly smaller number of trading venues (within a relatively concentrated geographic area) compared to Europe, which boasts potentially hundreds of venues, spread across the continent.

Given the regulatory backing from Esma, the support from trade body the International Capital Market Association (ICMA), and possibly from the European Commission in the coming months, Europe is likely to get its own consolidated tape—despite issues raised by exchanges and the sell side. If that’s to be, though, two crucial questions need to be answered: How? And why?

Not Easily Defined

For now, a European CT will focus on equities. Esma’s recent report, the first in a series of upcoming reviews of Mifid II’s ongoing implementation, calls for a high level of data quality, particularly OTC data, mandatory contribution of data by trading venues and approved publication arrangements (APAs), a strong governance framework, and sharing of revenues with contributors to the tape, in order to achieve a real-time tape for equities.

But Europe’s 170 lit equity trading venues—plus around another 180 systematic internalizers (SIs)—are mostly transparent, considering that their data is currently available via data vendors, and buy-side and sell-side firms already—grudgingly—pay for exchanges’ real-time direct feeds.

Given that, Christiane Baumgarten, senior vice president at Deutsche Börse, is asking: Why, then, are we doing this?

“The question arises: Why has the CTP not yet arrived? Why is there not data available in a consolidated format? I think there are several reasons: One is that the regulation is unclear about a use-case,” she says. “As of today, you see that market data vendors already aggregate market data; data is usually from exchanges because it’s of a reliable quality, which is not the case for non-exchange market data. The question then is: What should the CT deliver? What is not yet there from market data vendors?”

Data on equities traded in the OTC markets—i.e., not executed on an exchange—comes with a hefty set of quality issues. Misreporting and delays are rife in the dark markets. Mike Hodgson, head of information services at Euronext, says what the exchange is hearing from clients has changed drastically over the last year. Sell-side firms, he says, assert that the OTC space is where the transparency effort should be—and if quality issues can be fixed first, distribution might be better handled by data vendors, who could connect to those markets and distribute that data alongside the data they already provide.

But fixing the data problems would call for data and reporting standards, and getting hundreds of venues to rally around the same format—particularly venues not mandated to do so, like dark pools and SIs—would be an onerous process in itself. One initiative already seeks to establish this, the FIX Trading Community-led Market Model Typology (MMT), which Rainer Riess, general director of the Federation of European Securities Exchanges (FESE), believes everybody should adopt.

“Only when you speak the same language in reporting are you able to consolidate,” Riess says. “That, we think, is a very good thing. I think the dissent is on the timing: Should it be real-time? Esma has advocated for that, and they’re also saying [in the report] that they will need five to seven years to really construct this consolidated tape. I think that shows how complex it is.”

Riess agrees that first and foremost, cleaning up the data is vital. If everyone reports clean data, he says, an end-of-day tape would provide the most value, and could be accomplished quickly and easily. He adds that the tape would have to account for deferred trade reports, where in some cases, waivers are granted by authorities to delay a trade report by 60 minutes up to the end of the next trading day.

“A real-time tape is never going to be real-time; it’s always going to be near-time,” Riess says. “But to find use-cases, who would actually need the data that fast who doesn’t have it today? And how much are they willing to pay for it?”

Money Talks, Exchanges Walk

Cost is a key consideration—what will users pay, and what will a tape cost to create and operate? Also, will the official CT serve as a single source of truth, or just another datafeed that firms must subscribe to (and pay for)? No one seems quite sure.

We can define the consolidated tape as a solution to market data costs, as a solution to transparency problems created through fragmentation, as a way to support best execution. I think what we’re starting to settle on is that the objective is to allow investors to see the liquidity that’s accessible to them in the market at any given time.

Mark Schaedel, IHS Markit

Without a clear price tag on any of those undertakings, it’s understandable that market participants would shy away from something that might simply add more to their existing data costs. Additionally, exchanges—many of which have been critical of the project—view the tape as a shot over the bows of their highly profitable data businesses, says Mark Schaedel, managing director of IHS Markit’s Index Services business, who once chaired FESE.

“Exchanges seem to feel the most threatened by a tape due to the potential impact on revenue that they create from the sale of their market data. But, as the US environment should illustrate, the tape provides a new source of revenue, which should offset any impact to proprietary data revenues,” he says.

Contributing exchanges would be remunerated via a share of the tape revenues, per the US model. That’s well and good, says Nasdaq’s McKeone, but it’s not really the point.

“There is a really toxic debate around market data in general, because users don’t want to pay any more than they do today—but the fact is they are potentially going to have to pay even more in the future if they need the tape, but also the direct feeds from the exchanges, and we believe that is an issue that needs to be addressed,” he says.

Show Me the Use-Case

There’s been a lot of noise around the tape since its inception, and the reason for that is that some feel that it’s a solution without a very well-understood problem—thus, the solution can be anything you want it to be, Schaedel says.

“We can define the consolidated tape as a solution to market data costs, as a solution to transparency problems created through fragmentation, as a way to support best execution. … I think what we’re starting to settle on is that the objective is to allow investors to see the liquidity that’s accessible to them in the market at any given time.”

If that’s the case, he says, investors can measure their performance and hold their brokers responsible for that performance. There are a lot of different questions that arise when a broker doesn’t—or can’t—get the price an investor asks for, even though it was available. Was it because the broker wasn’t connected to a certain trading venue? Was it because their order was sold to another aggregator? Because there’s no consistent record of what happens in the market today, investors aren’t getting answers they deserve—“And that’s a fundamental problem,” Schaedel says.

Of the 10 sources interviewed for this story, each said use-cases for a consolidated tape had yet to be well-defined.

An executive at a European investment bank contended that their firm wouldn’t—and couldn’t—really be a user of the tape for trading purposes. Most sell-side firms already have quasi-consolidated tapes for their own activity, as do buy-side firms. Where exchanges potentially have a problem, they say, is around the cost of market data.

“Had Europe had a free consolidated tape, a lot of buy-side organizations, specifically, wouldn’t have to subscribe to their market data [provider] to have their own CT because not all industry activity demands use of real-time data feeds,” the bank executive says. “Organizations like us probably are not one of the users of CT for this purpose because for us, around our trading and algorithms, we need to have access to the real-time exchange market data feeds.”

• READ MORE: Plato’s Planned Platform Could Serve as Precursor to European Consolidated Tape: Industry experts say not-for-profit organization is building a post-trade market data platform that could be a precursor to an EU consolidated tape. Click here to read more.

For the firm, what a CT would be good for is portfolio management and risk assessment. The source says it would be nice to see clearly things like European Best Bid and Offer (EBBO) or what the preference price of a stock was at a specific point in time. Sell-side firms are less concerned, they say, because no matter what, they will have to consume the exchange data. They see the CT as appealing more to buy side firms, because it could potentially save on “overkill” costs where firms are subscribing to market data feeds on behalf of certain clients.

The Investment Association (IA), a trade body representing roughly 250 UK asset managers, supports the project and its development. Gina Dimitrova, director of investment and capital markets at IA, says the fair and effective functioning of the market relies on equal access to market data for all investors, and the IA welcomes Esma’s recommendation for a real-time tape for equities—but she has one caveat.

“The creation of a consolidated tape is not, however, the panacea for the immediate issue of the rising and high cost of market data, including index and other processed market data, which is of continued concern for the Investment Association and its members,” she says.

The banker, too, isn’t sure how the CT will impact market data costs more broadly.

“Some say it should be offered for free, especially if it’s for a 15-minute delayed tape or something like that. Some say it should be offered on a reasonable commercial basis. How is a reasonable commercial basis going to work?” the executive says. “We don’t know, because as you can see from the latest Esma consultation paper, obviously they have moved to make sure that all market data is provided on a reasonable commercial basis in work. So it’s a conundrum.”

The capital markets have tried to hash out the “who,” “what,” “why,” and “how” details of the CT. And maybe, some sources say, the reason they haven’t is because those questions would be better posed to—and answered by—retail markets and investors.

“Why do I need it?” says a director at a global data vendor. “Is it a legally reliable print that I’m absolutely able to quote in all of my best-execution reporting, all of my confirmation reporting, and all of my market-abuse reporting? No. … I think the political driver was to say it’s a good thing for the market as a whole—we mean retail—to be able to see a single, reliable source from a single place that would absolutely tell them what the price and liquidity is in all European instruments. That’s not necessarily a bad thing, but for institutional purposes, it doesn’t really add anything because it’s not something that’s required for institutional trading.”

Then perhaps, still, the most daunting question the industry and its regulators must answer is unnervingly simple: Why is a CT good for the EU as a whole? And to arrive at an answer, thinking might need to start small, with the basics. Before the EU can address the technical details—real-time versus near-time or end-of-day, equities versus fixed income, lit markets versus dark pools—it must understand its fundamental problems, and come up with the best solution to fix those.

Though IHS Markit, as a data vendor, sees itself as an objective party, Schaedel has been a prominent figure in the CT debate for the last decade. Together with the  current European CEO of Aquis Exchange, Graham Dick, Schaedel founded the COBA Project, which sought to establish a consolidated tape of European quote and trade data. It was shut down in 2013, only months after its launch, citing “insufficient support” from the organization’s stakeholders, which included a number of market data vendors, buy-side and sell-side firms, exchanges and multilateral trading facilities (see Looking Back At COBA below). 

Seven years ago, those organizations were the stakeholders the industry paid the most attention to—today, that hasn’t much changed. There might lie the problem.

“We’re asking the exchanges if they want it. We’re asking the banks if they want it. We’re asking the asset managers if they want it,” Schaedel says. “Who’s asking my father if he wants it? Does my father know he wants it? All he knows is he’s not sure about investing in the market because he doesn’t trust us as an industry.”

‘Ripped Off’

Whether the CT is focused on the retail or capital markets, the underlying market structure problems must be addressed first, Schaedel says. The tape, at the very least, is a way of increasing investor confidence. If the conversation prioritizes increasing transparency—as it should, he contends—that opens up doors to fixing a number of other challenges the industry has tried to solve with other rules and regulations, such as caps on dark-pool trading.

“It’s a really hard argument to say, ‘I don’t want this because it affects my commercial business,’ when investors are potentially being ripped off every day and they don’t know it—that’s everyone’s problem,” Schaedel adds.