The creation of a consolidated tape for equities is the most important market structure change for the buy-side under MiFID II, according to results from the latest poll on theTRADEnews.com.
One-third of poll respondents saw the consolidated tape as the change the buy-side will be hoping for most, followed by fixed income transparency (30.2%), a better framework for dark trading (26%) and algo trading/HFT curbs (10.4%).
The results reflect a lack of movement toward the creation of a consolidated tape since MiFID’s initial introduction in late 2007, with buy-side traders suffering from a decline in the quality of market data that drives their investment decisions.
Without the data on previous trades in a stock, it is almost impossible for institutional investors to determine whether they paid the best price for a stock, both prior to making an investment decision and after a trade has been completed.
While MiFID II aims to end the buy-side’s data woes, most market participants will be hoping an industry-led solution emerges before European regulators agree on a final level one text.
A number of industry-led efforts to establish a consolidated tape have tried and failed, primarily because of the continued reluctance of domestic stock exchanges that are unable to reduce the price they charge for market data to facilitate the creation of a reasonably priced solution.
But there might finally be some light at the end of the tunnel, with the COBA Project, an independent body set up specifically to tackle the consolidated issue, unveiling a plan that goes some way in assuaging the loss of revenue exchanges would suffer.
“The real issue on what the consolidated tape would achieve – i.e. improving the information that drives today’s fragmented market structure – has been lost in the commercial debate. The commercials surrounding a tape are important, but the transparency issue must be the first priority,” said COBA cofounder Mark Schaedel. “It is critical the industry – including regulators – has a clear view of what a consolidated source of post-trade data would provide.”
COBA plans to redistribute the revenues earned by a consolidated tape provider to those trading venues that have the most influence on the price formation process. Domestic exchanges that typically have the lion’s share of trading for their home markets would theoretically gain the most income from this arrangement.
If the industry can’t get its act together, regulators will step in and act on its behalf.
MiFID II offers three options. In addition to allowing for competition between consolidated tape operators, there is also a call for tender option or a single provider that would be mandated to run the tape as a utility.
Data quality for all options in MiFID II would be governed by an Approved Publication Arrangement, newly created entities that would clean and format data for the purposes of consolidation.
If regulators are forced to act, the final solution may be technically sound, but the commercial incentives may not find favour across different types of market participants in the same way the COBA initiative has planned for. “Some market participants may be worried about the impact increased transparency would have on the market, and there is an execution risk associated with a project like the consolidated tape. However, a market-led solution is bound to produce less unintended consequences than a regulatory-drive one,” added Schaedel.
In terms of fixed income transparency, there are still many proposals that remain up for debate. In particular, the Council of the European Union – which is in the process of finalising its version of MiFID II, is still contemplating the best way of reporting bond trades.
The Council’s latest draft allows the reporting of bond trades to be calibrated to the individual characteristics of each instrument, with the thresholds relating to when transactions need to be reported as defined by the European Securities and Markets Authority. Moreover, the Council has included a provision that allows the reporting of the exact size of trades to be deferred for an extended period.