Opening Cross: Hail CESR, Conqueror of European Data

Last week, the Committee of European Securities Regulators formally recommended that the next version of the Markets in Financial Instruments Directive should provide a pan-European consolidated tape of data from exchanges and multilateral trading facilities to increase market transparency, just as exchanges - which arguably could lose out under such a plan - reported mixed financial results for the second quarter of 2010.

In North America, TMX Group showed a modest 4 percent increase in Q2 revenues to C$36.8 million with higher revenues in most areas and a 1 percent increase in subscriptions to real-time TSX and TSX venture exchange data, offset by a 9 percent decline in Montreal Exchange subscriptions, while Nasdaq OMX saw a 3 percent rise in US data revenues to $32 million. However, Nasdaq's European data revenue declined by 11 percent year on year, while the London Stock Exchange's recent Q2 data revenues were virtually unchanged from the previous year, with gains from non-real-time data products, though subscriber numbers to real-time data declined. Deutsche Börse reported strong gains in data revenue from its acquisitions of Stoxx and Need to Know News, but also reported higher operating costs.

Until now, exchanges have largely been indifferent or totally opposed to a European consolidated tape. This isn't just because a centralized source of basic market data could cannibalize their own revenues from direct sales and redistributor agreements - after all, a for-profit tape operator would presumably pass-through data revenues, while a non-profit consolidated tape utility would divide its "reasonable" fees between contributing exchanges, like the model adopted in the US - but may be driven by concern that a consolidated tape would precipitate a further shift of liquidity away from primary exchanges to other venues. Meantime, MTFs who don't charge for market data but would benefit from the added exposure of a consolidated tape - and end-users who believe it will reduce the cost of gathering pan-European data - have been vocal in their support for a tape.

More visibility makes accessing other venues easier, and easier access makes firms more likely to trade there. More trading on MTFs likely means less on domestic exchanges, and hence lower execution revenues (which have already tightened as a result of the new competition from MTFs), while less trading on-exchange makes it harder for an exchange to substantiate the claim to being the primary market in the stocks it lists. In turn, this potentially makes it harder for exchanges to charge a premium for their data, and - as MTFs become a source of benchmark prices - makes it more likely that those venues that currently provide their market data free of charge will seek to exploit potential revenues from that data as its value grows.

The consolidated tape recommended by CESR concerns trade data primarily for the purposes of price formation and best execution, since CESR's consultation with market participants raised concerns about the quality and timeliness of post-trade data, as well as barriers to consolidation - which can be an issue on exchange venues or over-the-counter markets. In fact, according to CESR, "many market participants... have noted that the quality of the transparency data has deteriorated significantly since MiFID was implemented in November 2007," particularly in the over-the-counter equities market and reporting of OTC-executed trades.

Hence, a consolidated tape has the potential to bring transparency to all areas of price formation. And with it now almost certain to appear in some form, those opposed should figure out what role they want to play in its existence, and how they can turn it to their advantage.