One Tape to Rule Them All

One of the unintended consequences of the European Commission’s original Markets in Financial Instruments Directive (MiFID) pan-European financial regulatory framework when it came into force in 2007 was data fragmentation in European equity markets. The segmentation of markets provided a whole series of different sources for the same data. As those different platforms or different data sources became more important, it became increasingly necessary to reference more than one single share price, which historically only required prices from the main (and often only) domestic exchange. 

Graham Dick, head of client relationship management at European exchange Aquis, says industry participants required a consolidated view of the pan-European market as far back as 2008.

Smaller European markets, such as those operated by Aquis Exchange, receive less exposure than they would if a consolidated tape existed, Dick says. “The core components of MiFID II are transparency and best execution. If you have transparency for a proper consolidated tape, then you have proper judgment with regard to your best execution. If you don’t, then how can a regulator impose best execution if they don’t have the data to reference?” he adds. 

While the EC’s regulatory enforcer, the European Securities and Markets Authority (ESMA), has listed a consolidated tape of post-trade market data as a core tenet of MiFID II, it has stopped short of appointing a single provider, instead leaving it up to the market to decide how this role will be fulfilled. Consolidated tape providers—of which there can be several—will capture and disseminate stock prices from all trading venues. This feed will be made available in as close to real time as technically possible on a “reasonable commercial basis,” and will be free of charge after a delay of 15 minutes. ESMA has given the industry two years following the MiFID II implementation date of Jan. 3, 2018, to come up with its own solution. If the industry fails to do so by that date, the regulator will enforce its own solution.

“The core components around MiFID II are transparency and best execution. If you have transparency for a proper consolidated tape, then you have proper judgment with regard to your best execution. If you don’t, then how can a regulator impose best execution if they don’t have the data to reference?” Graham Dick, Aquis Exchange

Independent consultant Chris Pickles says that throughout the drafting process of MiFID I, ESMA—then the Committee of European Securities Regulators (CESR)—made it clear that a consolidated tape was needed to reform the European cash equities markets’ post-trade data regime. Pickles, who chaired the MiFID I joint working group—a combined activity of industry bodies FISD, FIX, ISITC Europe, RDUG and Twist—between 2004 and 2007, says the regulator made clear to them that while a model proposed and developed by the industry would be preferable, CESR would impose a consolidated tape system on market participants if the industry could not. “It’s saying, ‘Either you do what we tell you, or we will make it happen.’ That’s been hanging over the market since the original MiFID I came in,” Pickles says.

But mandating a consolidated tape isn’t a result of the financial crisis, or even the pre-crash MiFID I. In years past, though the US has had a functioning consolidated tape for many years, exchanges across Europe have tried and failed to come up with a solution.

While US regulators authorized the Securities and Exchange Commission to create a tape in 1975, European counterparts missed an opportunity to provide a “clear mandate” for a tape under MiFID I, says the head of data at one exchange. 

However, in 1990, European stock exchanges did come together in an attempt to grind out a solution. That attempt was project PIPE (Price and Information Project Europe). Working together under the aegis of the Federation of European Stock Exchanges (FESE), the aim of PIPE was to bring together the various datafeeds distributed by each exchange and create a consolidated feed. But PIPE was short-lived and the concept burst in 1991. Pickles says this was primarily a result of competitive fears. 

“They felt that if the market created a consolidated feed, then the market would see where the most cost-effective place to trade was, and if that turned out to be London then the PIPE project could just turn out to be a pipeline of order flow to the London Stock Exchange. All the exchanges backed out one by one until PIPE died,” he says.

When CESR began its overhaul of MiFID in 2010, it stated in a consultation paper that “significant barriers to the consolidation of post-trade data remain and that, without further regulatory intervention, market forces are unlikely to deliver an adequate and affordable pan-European consolidation of transparency information.”

So while regulators began the epic task of fleshing out MiFID II, the industry took up the reins on fulfilling its obligation to create a consolidated tape. The COBA Project, an independent organization established in 2012 and dedicated to the development of a consolidated tape of pan-European market data, attempted to rally interested parties—buy-side institutions, brokers, and exchanges—to come up with an industry-led solution. “What COBA tried to do was effectively say, ‘If we do not find an industry solution to this problem, it will be a regulated nightmare,’” says a source familiar with the project. 

To be successful, COBA needed buy-in from the exchanges who “own” the data. While it had just over a half dozen European exchanges prepared to work together,  Deutsche Börse and the London Stock Exchange were notably absent. Bats Chi-X Europe committed to help fund COBA in early 2013, but later withdrew its support, citing insufficient commitment from other exchanges and trading venues. This doomed COBA—which was lining up to become the consolidated tape administrator—and the think-tank disbanded in 2013.

However, a second source close to COBA says that failure so far to create a consolidated tape has nothing to do with commercials concern. “While the party line has been for some time that it’s too expensive to create one, that’s not true,” the source says, citing a lack of “political will” to create a tape.

“There are some very strong lobbying groups in Brussels for the different parts of our industry, and the exchanges have a pretty strong lobbying group. When you’re asking politicians to make rules around such technical detail, it’s not always obvious. Everyone knows about the debate around the consolidated tape, and it’s not as if they haven’t been informed. There has been a lot of talk going on about it—we brought COBA to the attention of a lot of people in Brussels,” the source says. 

Many have pointed the finger of blame at exchanges protecting their own interests around lucrative data revenues. For example, in 2015, the London Stock Exchange earned revenues of £525 million ($646 million) from information services, representing 22 percent of total revenues.

But others say that crucial problems lie within the MiFID text itself. “The MiFID II text lacks precision, and it started to be interpreted in different ways,” the same source says. “Within the text, it says ‘If there is not an industry solution then this will be applied by delegated acts—and the delegated acts will be two years after the implementation of MiFID II,’ so somebody like a large exchange that is getting big revenues is saying ‘We will apply a consolidated tape as and when it has to be done, but not before that, because we have this revenue opportunity that we don’t want to lose until MiFID II is actually implemented.”

Confusion also lies around what a consolidated tape provider (CTP) would look like, given that regulators have abandoned the stance that there should be one single CTP—a utility created with that sole purpose. The official position of the EC is to support an option that would involve multiple tape providers offering competing tapes. It considers that competing providers can produce affordable consolidated tapes that would help investors to achieve and evaluate best execution.

Industry body FISD says it first held meetings with the different parties to try and thrash out their issues and facilitate some kind of consensus around what the tape should look like. FISD program director David Anderson says it was evident even from early discussions that the various points of view were at odds. The efforts of the meetings then evolved to concentrate on untangling some of the ambiguity within the text. “We put aside some of the political discussion and instead focused on the phraseology of the text,” Anderson says.

One industry expert says the ESMA text creates potential confusion between CTPs and existing data vendors. “They’ve come out with this confusing concept that there could be multiple consolidated tape providers. What does that mean? You could argue that Thomson Reuters and Bloomberg are already CTPs—they say they take multiple exchange feeds, consolidate them and provide them in a single feed. But are they technically a consolidated tape provider as per the ESMA definition? Which would mean that you would have to have every single exchange on the feed,” the expert says. 

Pickles agrees: “The large data vendors—Bloomberg, Thomson Reuters, ICE Data Services (formerly Interactive Data) and SIX Financial Information—already consolidate data across Europe into their products. They’ve always argued, ‘Why do we need a consolidated tape when there are consolidated sources of data commercially available already?” he says. “If somebody else stepped up and said ‘We will produce the European consolidated tape,’ they would have to bring all of this data together—and that’s a mammoth task. The regulators themselves are starting to understand the volume of data and the huge volume of instruments involved, and they’re only just beginning to see it,” he adds, referring to the rapid growth in the number of financial instruments since the implementation of MiFID I, and the data efforts involved in capturing information on that many instruments. 

The industry expert agrees that there seems to be reluctance for anyone within the industry to volunteer to be a CTP. “If you play devil’s advocate, why would anybody? What’s the point? The EC has said it would welcome people to be consolidated tape providers, but there doesn’t appear to be any particular motivation for somebody like an existing data vendor to provide a sort of consolidated feed—probably a sub-set of their total data. Why would they want that to be under a regulatory regime? Data vendors are not regulated: Yes, the regulators make this comment that there can be multiple consolidated tape providers, but there doesn’t seem to be any particular structure for that to happen,” the expert says.

Permissive Parenting

Depending on which handbook you read, the “empty threat” can be a big no-no when trying to discipline a child. Not following through when threatening to take a child’s dessert away can disarm a parent’s attempts to establish themselves as an authority figure. ESMA now faces problems with the interpretation of its threat: “ESMA has set itself up as saying ‘If you don’t sort yourselves out, mommy and daddy might come and take the toys away,’ where ‘might’ is the big thing—don’t think it’s an absolute commitment,” the industry expert says. 

Pickles agrees that the regulators may resemble lax parents in their approach to this particular part of the text. “It may not be something that the regulators push hard for on compliance, just as they didn’t do for MiFID I,” he says. “They may take the same approach for MiFID II that this is all a tuning exercise—you get it part right with ISD, [the Investment Services Directive, adopted in 1993] a bit more with MiFID I, a bit more with MiFID II, and doubtless there will be a MiFID III to address the things that didn’t get done properly with MiFID II.”

With the lack of incentive for the industry to get moving on its own solution, it will likely fall to ESMA itself to work out how to achieve its original aim. “There will be some attempts made to move it forward, but I don’t think it will achieve its objective, and we’re left with two years before the regulators have almost forced themselves to act and figure out a plan,” says the second source.

Pickles says there is still the potential for ESMA to make good on its threat and impose a regulator-run consolidated tape. But before it can embark on this, it must complete its Financial Instruments Reference Data System (FIRDS) data collection infrastructure, which is being built from scratch and will likely be completed in 2018. FIRDS will necessitate linking datafeeds between ESMA, National Competent Authorities (NCAs) and around 300 trading venues across the European Union. “Once you’ve got the reference system and you’ve spent millions building that, then you’re in a much better position to impose your own system,” Pickles adds.  

“In theory, if ESMA manages to get its data collection process correct, if it gets it right and can collect it, then theoretically, ESMA can mandate a consolidated tape under a ‘delegated acts’ following the implementation of MiFID II,” the second source says. Which means that if ESMA gets tired of waiting for different industry groups to set aside their own interests and work together, it could impose its own solution earlier than expected, and force them to accept it. 

Or, to use the parenting analogy, tired of waiting for its kids to fix their own dinner, ESMA will cook its own meal and make everyone eat from the same plate. Bon appetit.