Industry Still at Odds Over Use Case for an EU Consolidated Tape

Years after regulators began thinking about a consolidated tape—an aggregated source of market data that could bring deeper and more transparent capital markets to Europe—no provider has materialized. Almost everything about the tape is a matter of contention for some with vested interest, from its revenue model to its content, and the matter of what it’s actually going to be used for is no different.

Some market observers say one way to sidestep the issue of market data costs—long cited as a deterrent to the emergence of a consolidated tape provider (CTP)—would be to develop the tape to consume and disseminate data on a delayed basis of 15 minutes. 

Sassan Danesh, managing partner at eTrading Software, is one proponent of this approach. “Many organizations want to use the consolidated tape for best execution or transaction cost analysis (TCA). There is no reason why that can’t be done based on a tape that is 15 minutes old,” Danesh says. 

Market data costs are prohibitive for a CTP if it has to purchase it at venues’ commercial prices, while also operating on a cost-recovery basis, Danesh says. The only way this would make sense is to make the contribution free, he adds, and indeed, market participants have argued that this should be the case. But Danesh says this would impact trading venues’ revenue models.

However, he continues, there is a solution. Mifid II mandates that venues and approved publication arrangements (APAs) make post-trade data available free of charge 15 minutes after publication. If the CT worked on the basis of 15-minute-delayed data, that would not impact trading venues’ revenue models, which monetize relatively low-latency and real-time market data, Danesh says.

“If the data is 15 minutes old, the infrastructure costs are low, as opposed to if it was real-time and the data coming into it would be free, and would not impact trading venues’ business models,” he says.

However, while a delayed tape might be just fine for performing TCA and showing best execution, it would be less useful for market data consumers in wholesale markets, or who use electronic trading systems, as they need low latency and full depth of book.

Danesh concedes that “you couldn’t use that for something like smart order routing, or that kind of thing where you really need real  time. But for any kind of historic analysis, it’s perfect. How I see many of sell-side and buy-side analytics engines working, most of the data is being used for capabilities along the lines of, ‘OK, let’s go back and look at all the trades we did, and do our P&L, and ask what was our slippage based on TCA.’”

History Lesson

Paul Humphrey, CEO of data and analytics company BMLL Technologies, believes that this setup would lack the capabilities required to address the broad range of use cases that will gain it widespread industry support. “It’s not going to give you a consolidated view of the depth of the marketplace. You only get that when you collect every single order that is sent to an exchange—every single fill, every single price, the whole depth of the book. Trying to consolidate that in a 15-minute time period wouldn’t give you enough insight,” he says.

Last year, BMLL partnered with the Plato Partnership, a non-profit organization comprised of 35 large asset managers and banks, to produce Platometrics, a free-to-air platform to deliver market quality metrics on European equities. At the time, sources close to Plato told WatersTechnology that the project could function as a precursor to a consolidated tape.  

For a mark-to-market view at the end of the day, or for compliance purposes, a tape that displays the best price from 15 minutes ago is fine, Humphrey says. But it’s a very different product to a post-trade tape of deep historic data.

“If you are programming an algo and you want to get intelligence about where to send that order in that stock to the right exchange with the right fill probability at the right time to get the best level of execution, then it’s a consolidated, historic, Level-3 tape that will give you that,” he says. 

Level 3 data is full order book data, with every single order identifiable, as opposed to level 1 data, which is top-of-book, and level 2, which is the order book aggregated by price. BMLL offers level 3 data and analytics around that. 

Certainly, a 15-minute delayed tape would not help market participants identify addressable liquidity, Humphrey says.

“Lit venues are not the whole of the market. There are systematic internalizers, dark pools, technical trades that happen. So if you really want to understand the activity of a stock, you have to understand it across all these venues,” he says. “Now that is great, but is all that liquidity across those venues addressable to you? On the systematic internalizers there may be great liquidity, but unless you have a bilateral agreement in place to trade on that liquidity, there is no point in you seeing that on a consolidated tape.”

Plato members, working with BMLL, tackled this issue last year. They grouped liquidity types into four buckets to understand what was addressable. These four buckets were lit addressable (exchange trades), bilateral addressable (price-forming trades that require a bilateral agreement), dark grey addressable (liquidity that contains full post-trade transaction data but has limited pre-trade data available because it’s on dark pools), and non-addressable (technical trades, swap unwinds, post market-close trade reports).

“You couldn’t possibly get that level of understanding of those four liquidity buckets in a 15-minute delayed tape,” Humphrey says.

No Use Case

Alex McDonald, CEO of the European Venues and Intermediaries Association, says the use cases for the tape will probably be best execution, and for better data management. 

“The initiative seems to be largely predicated on the thought, ‘Let’s build some rails and then we will see what can run on it,’” McDonald says. “Given the developments under [the Financial Conduct Authority and Bank of England project on] Digital Regulatory Reporting of semantic regtech and data lakes, such a tool will likely help further data organization, and hopefully be an egalitarian process towards public policy objectives, though nobody is quite sure how.”

However, McDonald doesn’t see an immediate use for the consolidated tape beyond cash equities. 

“Utility for a CT should be theoretically easier in cash equities for market structure reasons, and more so because markets have significant retail participation, and the deepening of this segment is a direct objective of a capital markets union. Retail can be helped out by cheapening the costs of both data and execution, best achieved by making the whole order routing system easier,” he says. 

Beyond cash equities, however, the use cases are yet to be proven, given the suspension of best execution in Europe, he adds, referring to the European Securities and Markets Authority’s decision to ease best execution reporting requirements for firms to free up resources during the Covid-19 pandemic.

“This should not matter, because the CTP is akin to building the rails for the [data] trains of the future and simply continues to develop the data standardization and transparency agenda,” McDonald says. “Our stance is that if the CT enables the pre-trade transparency obligations under Mifid II to be rationalized or removed, then we would happily champion a post-trade tape. But the use cases are still largely absent unless the post-trade tape is close to real time, a meaningless concept outside liquid equities and spot foreign exchange.” 

A recent, EU-backed report by consultant Niki Beattie recommends that the CTP be run as a utility that consolidates post-trade data. Beattie, a former head of EMEA market structure at Merrill Lynch, and CEO and founder of consultancy Market Structure Partners (MSP), includes a section in her report on potential use cases in the report, noting that “multiple use cases exist for CT data.” The report includes a table laying out 14 use cases, including in issuance, asset allocation, post-trade analysis—under which TCA and best execution would fall—and market surveillance.

Beattie says in the MSP report that overall, a consolidated tape would help improve investment decisions, provide accurate information to investors and optimize the use of capital. It would give surveillance and risk managers more accurate and consistent data. And it would benefit regulators, who would have more improved and comprehensive data to aid policy decisions and help monitor the market.

McDonald says that, outside the “well-established case” for best execution documentation and TCA (number six on the table in the report), it’s hard to find a compelling use case in the report.

“Numnber six [on the list] … is very much the use case of the CT. You could argue that the seven aspects listed in the report after No. 6 are already done—CSDR penalties, funding analysis, regulatory reporting in general—is completed. And prior to No. 6 are pre-trade or point-of-trade, and therefore not in the scope of this post-trade context. Which leads you back the point: a CT would be very useful for TCA and best execution, and it would be useful to have a big set of quality standardized data that is normalized for a variety of future use cases,” he says.

While the MSP report reflects a general consensus in the industry that a consolidated tape would be desirable for European market participants, regulators and risk managers, there is still disagreement on the optimal design, and therefore the ultimate use cases, of a solution.