The tale of the tape

A European consolidated tape can be good for everyone, especially for retail investors, who are after all the bedrock of the industry, writes Caroline Serdarevic, head of Millennium Europe, a broker-dealer for global corporate bonds, municipal bonds and mortgage-backed securities.

The move towards a consolidated price feed for European credit markets seems to be inevitable. That’s good news, especially for retail investors who have been hamstrung by the lack of price transparency – and therefore decent liquidity – for far too long. The delay in the implementation of a European consolidated tape does have a silver lining, providing the opportunity to learn lessons from the US experience. These can be adapted to the nuances of the European market without undue fuss but, as with many things, the devil will be in the details.

While the structural differences between the US and European markets are real enough, the underlying benefits of a consolidated tape are equally compelling. Put simply, a real-time – or near real-time – tape would have a meaningful impact on transparency and execution quality for retail investors in European credit. This is especially important in the Euro-zone, which has a long history of retail involvement, dating back to the coupon-clipping days of the “Belgian dentist” in the latter decades of the last century.

The move to a European tape has not been easy. For years, there has been pushback from many influential sell-side financial institutions. While most neutral observers hoped for a breakthrough in Mifid II, it was not to be. This entrenched reluctance is not surprising to anyone following the glacier-like progress of e-trading over the past quarter century.

Electronic trading and a consolidated tape have been like twin sisters marching together in a protest rally for nuclear disarmament. Most people see that the causes seem to make sense, but the political and structural obstacles make it a tough sell.

While the economic incentives for many market participants to slow the development of e-trading since its emergence in the late-1990s are obvious, there have been seismic changes in the landscape over the past five years that mean that a consolidated tape is now more likely than ever before.

Major electronic platforms, such as Tradeweb, Bloomberg and MarketAxess, have voiced their collective support for a European consolidated tape. That’s significant. It’s not just that these highly competitive firms are lobbying as a unit, which is in itself very rare, but also possibly that this coordinated response could reflect an underlying shift of sentiment beyond them; that perhaps there is at least tacit acknowledgement from the largest banks that the market landscape has changed dramatically.

Most banks have also developed algo-driven trading platforms that are competing with the legacy dealer-to-client platforms, while market structure has shifted so that many buy-side firms, have also taken on a role as a liquidity provider.

As the finger has been removed from the metaphorical dyke, liquidity is now spilling more freely around the marketplace than ever. This is good news for competition, and it’s great for retail investors, in particular, who are starting to gain more access to broader price transparency.

Against this backdrop, more cynical observers might suggest that the horse has bolted; that the introduction of a consolidated tape offers little more than cover for the industry. But this isn’t really the case.

A European consolidated tape can play a major role in concentrating price transparency, that is now much more fragmented and harder for a retail investor to track. The key to the value it can play will be in the specifics. While a tape should cover as much of the marketplace as possible in near real-time, like the TRACE tape in the U.S., it’s clear there are limitations: for example, it likely will have size cut-offs for round lots and other mechanisms to avoid inadvertently choking off liquidity by exposing the hands of some of the larger players.

The number of regulators involved is complicating the process, but if the industry can get “the ball over the line”, a European consolidated tape can be good for everyone, especially for retail investors, who are after all the bedrock of the industry.