CESR’s new consolidated tape faces old cost barriers

Cost remains the biggest stumbling block to the latest proposals from CESR, the European securities regulator, for a single European post-trade data feed, according to market participants.
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Cost remains the biggest stumbling block to the latest proposals from CESR, the European securities regulator, for a single European post-trade data feed, according to market participants.

Buy-side firms have complained that the failure of MiFID, introduced in 2007, to establish a standardised, consolidated source of post-trade data across Europe’s equities trading venues has undermined their efforts to benchmark execution performance. This, investment institutions argue, hinders their attempts to deliver best execution to end-investors in line with the core objective of the directive.

In a consultation paper on possible reforms to MiFID released in April, CESR (the Committee of European Securities Regulators) made two proposals for cleaning up Europe’s post-trade data regime. The first would redouble regulatory efforts to facilitate existing commercially-driven consolidated tape solutions, but the second envisaged a more prescribed, interventionist approach. Market responses received by CESR, which is charged with harmonising securities regulation across European markets, will be fed into the European Commission’s review of MiFID, due for completion in 2010.

The commercial solution entails the creation of approved publication arrangements (APAs), which would have responsibility for cleaning and standardising data to enable easier and uniform consolidation. Similar to the Trade Data Monitor (TDM) regime, under which firms such as Markit BOAT were established for the reporting of off-exchange trades, APAs – which are expected to be drawn from existing market data providers and trading venues – would process post-trade data to a common standard.

A mandated solution would also result in the creation of APAs, but would require them and trading venues to send their data in a standardised format free of charge to a consolidator selected by a call for tender. This not-for-profit mandated consolidated tape (MCT) provider would make its data available for free after 15 minutes and would distribute any profits back to data providers.

The new proposals win plaudits for tackling data quality, but fail to convince on costs.

“The option of introducing APAs is an understandable response to address the data quality issues with the current trade reporting regime,” Andrew Allwright, MiFID solutions at data vendor Thomson Reuters, told theTRADEnews.com. “Allowing commercial provision of the tape will still depend on exchanges, multilateral trading facilities and APAs making their real-time trade data available at a low enough price to make the cost of a real-time consolidated tape acceptable. For example, there are currently more than 30 venues publishing trades in the EuroSTOXX 600. If each chose to charge €5, the total cost would be over €150 per month.”

In its consultation paper, CESR estimated the current cost of building a European consolidated tape at €450 a month, based on pre-and post-trade data for all European venues, compared to €50 in the US.

Most exchanges charge a single bundled rate for pre- and post-trade data, but the London Stock Exchange has hinted that it may unbundle in the near future. “We want to ensure our post-trade, on-book data is available to clients in a variety of service options that cater for the evolving manner in which they consume this content. We are currently reviewing our product range and evaluating options,” Jarod Hillman, head of real-time data at the London Stock Exchange, told theTRADEnews.com in March.

While data vendors are likely to throw greater support behind a commercially-led solution, buy-side traders may favour greater regulatory interference.

“CESR has made the right steps in trying to overhaul the TDM regime with APAs but I think many traders would prefer a prescribed approach,” said Steve Wood, founder of Global Buy-Side Trading Consultants and former global head of trading at Schroder Investment Management. “The fact that CESR was not able to determine accurately the level of trading in dark pools last year from the available post-trade data – not to mention the hefty fines dished out recently for poor transaction reporting – shows just how blurred the current regime is.”

UK regulator the Financial Services Authority fined Credit Suisse, Instinet and electronic market maker GETCO a combined total of £4.2 million in April for a series of trade reporting failings relating to almost 110 million transactions stretching back to 2007. Last year CESR was forced to ask national regulators to request information from investment banks about the amount of trading conducted in their internal crossing networks. This data is not currently separated out from normal over-the-counter trades in post-trade reports.

According to Allwright, the risks of the mandated solution include the inhibitions on innovation likely to result from the absence of a profit motive and a lack of clarity on costs.

“CESR’s paper leaves considerable uncertainty as to what revenues APAs could expect to extract from data publication, particularly if the proposal for an MCT be followed, where the trade data would have to be provided to the MCT for free with the vague possibility of some kind of revenue share,” said Allwright. “By mandating a tape, there is a real danger of creating a product that has be policed by regulators, costs millions a year but does not have enough revenue to cover its costs, which may create a situation where the market has to stump up each year.”