MTFs Urge Consolidated Tape in MiFID Review

"Competition has further driven down the cost of trading in Europe, but there is always more to be done. As we see it, driving down post-trade costs, developing a consolidated tape and tackling the issue of interoperability are three of the key industry challenges for 2010," says Alasdair Haynes, chief executive of Chi-X.

"We believe that Europe needs a consolidated tape of record and a European best bid and offer, and believe strongly that this is something the regulators need to address as part of the MiFID review. Once Europe has a tape of record, brokers' execution decisions can be measured against the standardized market pricing tape, and this will determine how well the market measures up and to where the liquidity needs to flow," Haynes says.

Charlotte Crosswell, president of Nasdaq OMX Europe, says the MiFID review needs to consider a consolidated tape or some form of standardized market data to achieve its ultimate benefits. "MiFID has clearly brought in more competition, fragmentation and reduced trading fees, but it hasn't addressed the fallout from that. There are a lot of issues with pre- and post-trade transparency that need to be addressed. I don't believe the cost savings on the trading side have been matched on the post-trade side," she says.

"It is important that the MiFID review leads to improved customer awareness and increased post-trade transparency so that retail clients get a complete picture of the market, because at the moment, they are only seeing part of it.... A consolidated feed that filters down to the retail customer is vital, especially as more liquidity moves to the MTFs. Inexpensive, consolidated post-trade data has to be the priority, but it won't happen on its own," says Olof Neiglick, CEO of Nordic MTF Burgundy. "We estimate the European market data market is worth $1 billion, so there are big commercial interests at stake, and without regulation or law to make it happen, no-one will give that up unless the regulators force them to."

The commercial pressures of competing with multiple new, low-cost venues is also expected to force consolidation among current players, with some pointing to the London Stock Exchange's acquisition of Turquoise as an indication of more consolidation yet to come.

"We expect equity trading in Europe to consolidate as volume starts to concentrate on four to six pan-European platforms with somewhere between 10 and 30 percent market share each," says Mark Hemsley, CEO of BATS Europe. "Increasing competition is the main factor that will prompt exchanges or MTFs to merge.... It is likely that much of the pressure for consolidation falls upon the incumbent exchanges in Europe, whose cost bases and technology offerings are not adjusting quickly enough to halt the deterioration of their market share."

However, Christian Katz, chief executive of the SIX Swiss Exchange, says "the proverbial cake is getting bigger," resulting in additional trading volume rather than shifts in liquidity to other venues. "We are the reference price for a large number of indexes, thousands of derivative products, innumerable exchange-traded funds, and so on. We are still the ultimate price discovery venue."

Hemsley says liquidity can still shift from traditional venues, while also expanding European trading volumes, which account for one-tenth of total notional value traded in the US. "Once European market participants begin to conduct their trading strategies without the expense, inefficiency and rigidity of the past, the total notional value traded, [as well as] the number of active securities and participants will multiply, perhaps four to five times what they are today."

As exchanges lose market share to new venues, though, some argue that exchanges' data should no longer command a premium price. "Pressure needs to be brought to bear on exchanges to make their market data available free of charge," Chi-X's Haynes says. "Compared with the US, where trading participants pay once for the data, in Europe the cost of data is four or five times higher on a value basis and up to 14 times higher on a per-share basis, given that trading turnover in Europe is six to eight times less than in the US," he says.

Katz says that although delayed data can be provided free of charge, data delivered in real-time may need to be treated differently, reflecting its value for trading and the costs involved in producing the data. "There is value attached to real-time data, which some firms would be happy to pay for. It is a very big simplification to think that it should all be free, because that isn't how it actually comes about-there is a process and infrastructure required," he says. "The market for data is fairly competitive and well-functioning. There is no longer a monopoly position, so if you price it too high, no-one will buy it.... We have created competition so the market will set the price."

Katz also warns against the dangers of focusing on a quick-fix to gain market share. "It's important for the benefit of the entire marketplace that the industry not be led by short term competition into unreasonable tariff pressure or proposals that all the trade data being generated should be provided for free or at a fixed price," he says. "That could harm the market and potentially lead to a backlash. We need to think about what will improve the quality of the market while still allowing competition to take place. It shouldn't be a race to the bottom in terms of quality, trust and transparency."

John Beck

The full interviews for this story appear in the April edition of Waters magazine.