SEC’s Redfearn: US-Style Consolidated Tapes Won’t Solve Trading Data Needs

A US-style consolidated tape is not the answer to the industry’s market data problems across the EU and beyond, according to a US regulatory executive.

Speaking at the TradeTech conference in Paris, Brett Redfearn, director of trading and markets at the US Securities and Exchange Commission (SEC), said there are two fundamental issues with the existing US consolidated tapes—latency and the lack of content available on the services.

The two US consolidated tapes—the Consolidated Tape Association and the Unlisted Trading Privileges (UTP) Plan—collect and consolidate quote, trade and post-trade data published by exchanges, which is then made available for public consumption.

Established in 1976 by the SEC, the program was anticipated to provide real-time data on trading volumes and pricing for exchange-traded securities, but over the decades has failed to provide this utopian source of instantly accessible trade data. In reality, the tapes are tasked with sourcing and aggregating data from dispersed trading venues and data centers, meaning that the geographical barriers have made it increasingly difficult to provide real-time data at the level required for everyday trading.

“That latency makes it fundamentally unusable for competitive institutional trading businesses or market makers. You can’t have the added milliseconds—or whatever it takes to go somewhere else to get [the] aggregated [data] and come back—so it is ultimately not competitive for trading purposes,” said Redfearn.

Other concerns regarding the current state of the US consolidated tapes include the lack of additional content, such as odd lot, depth of book and other messaging information. This has spurred the debate not only of whether the EU should adopt a similar version to the US consolidated tapes or construct a more efficient and effective model but also whether the US should either enhance the existing tapes or replacing them with an entirely different service.

Core Data

One issue that has emerged from these discussions is what constitutes a core layer of data, necessary for market participants to compete or engage in trading. Some believe that even a basic level of data is insufficient or offers little or no value to traders who are dependent on bespoke datasets for execution.

“Having a basic level of data is only useful for a small subset of retail investors who might be making a decision for themselves by watching the market. Generally, when investors are making trading decisions, they require a more granular level of information, given the automated nature of equities trading today,” says Brian Schwieger, global head of equities and co-head of equity, ETFs and fixed income trading and the London Stock Exchange Group.

The counter-argument is that institutional firms are exhausting their budgets to cope with rising data costs and that any standard level of real-time data, provided inexpensively or free of charge, could have a significant impact on bottom-line costs—especially for smaller buy-side firms, buckling under the pressures of margin compression. For many, the benefits of a consolidated tape are a holistic overview of the overall market and enabling firms to make informed comparisons on pricing.

“Having that [a consolidated tape] will be extremely beneficial, where you can really look at what you are doing—whether it is transaction cost analysis, pre-trade analysis or looking at the overall volume. Doing any kind of analysis is extremely helpful to know the full picture, otherwise, how do you compare what you have done to the entire market if you don’t know what the entire market is doing?” says Keshava Shashtry, head of capital markets at DWS Asset Management.

Data Costs

The wider issue of data costs has become a growing concern among financial firms as the prices of data from vendors and exchanges have increased steeply in recent years, causing institutions to call on regulators to take action to cap costs.

According to Redfearn, competition among data providers is an area of the market that regulators such as the SEC is “struggling” to deal with. Concerns such as price escalations put into question the level of competition that exists among exchanges and providers, and the US regulator is assessing the dynamics of the US markets in terms of competition, concentration, fragmentation, and complexity “across the whole spectrum,” he said.

“We have to look at not only the content of the SIP Operating Committees [which govern the US consolidated tapes], but we also have to look at what is going on in terms of the pricing dynamics of the market. Have we landed in a market environment where participants who can’t afford the fastest, best, co-located product are getting their data and information at slower speeds or getting their access to markets at slower speeds than others who can—and what does that mean in terms of fairness? What does that mean in terms of competition, and is that the dynamic that we were looking for when we thought about how our marketplace should evolve?” Redfearn said.