Making the case for an equities consolidated tape: myths and reality

Natan Tiefenbrun, head of equities at Cboe Europe, and Stephen Fisher, Managing Director, Global Public Policy Group, at BlackRock discuss the European Commission’s proposals for a consolidated tape included as part of the MiFIR review.

Stephen Fisher

Stephen, why is a consolidated tape so important to EU capital markets?

EU capital markets still remain fragmented along national lines despite years of pro-integration initiatives. This disadvantages investors and reduces the appeal of EU capital markets as whole and is brought into sharp focus by the absence of consolidated trading information. This makes it challenging to answer the key question: ‘at what price and in what volumes do European securities trade?’ As a result, investors of all types today have very limited visibility into overall European securities prices, quotes and volumes.

European capital markets can make a big leap forward in their integration – and their global competitiveness – with an ambitious framework for consolidated tapes, not just in equities, but for ETFs, bonds and derivatives too. This would allow investors to see prices and liquidity before they make decisions, ensuring that they can invest efficiently and cost-effectively. We are also in the midst of a retail revolution, globally, that has helped democratise trading and empower everyday investors. Consolidated tapes would inform more retail investors about the best trade prices and quotes which occurred in the market and create competitive pressures so that they cannot be disadvantaged.

Natan, why does the EU need a Consolidated Tape if firms can already purchase this data today?

A consolidated tape for EU equities would offer a dramatically simpler way to obtain data on EU shares from all venues. Given the current complexities of obtaining data, most firms restrict their data consumption –  rationing from which markets or venues employees or clients can see prices – giving them only a partial view of true pan-EU liquidity. As Stephen says, this undermines the ambitions of an integrated EU market in which all investors have access to the information about all shares trading on all EU venues. It would also, crucially, encourage greater retail participation in EU equity markets via improve data access and enhanced investor protections.

Stephen, do the European Commission’s proposals go far enough in ensuring consolidated tapes become a reality?

We welcome many of the European Commission’s proposals, with as close to real-time data as possible, a single independent consolidator per asset class and mandatory contributions from all venues featuring in the proposed model. In addition to a post trade equities tape, we would also welcome a pre-trade equities tape showing investors what prices are available. This would strongly enhance transparency and visibility for retail investors and provide a benchmark against which execution can be assessed. Pre-trade data is especially essential to facilitate investment in less liquid shares such as those of SME’s, which trade infrequently and post-trade data alone can be hours or days outdated. An equities pre-trade tape would also enable the creation of a robust, pan European reference price and strengthen resiliency in case any one market should suffer a technical outage.

Natan, isn’t it too complicated to launch a CT that is real-time and includes both pre-trade and post-trade in one step?

Those who say a pre- and post-trade CT is “too hard” are most likely opposed to the introduction of a CT for commercial reasons. There are already many data vendors and market participants who consolidate pre- and post-trade real-time data from many venues for their own use, or for redistribution. It is vital to understand that any equities CT would not be targeting latency-sensitive trading activities that require full depth of book data with the lowest possible latency, such as market making, high frequency trading or algorithmic trading; market participants that desire data for these activities will most likely continue to consume direct data feeds from venues as it suits their business models. Instead, a CT would be providing an accessible and affordable alternative suitable for on-screen displayed use by human beings, as well as for risk management and valuation purposes.  It is therefore more technically feasible as would only be containing the “top of book” and “last sale” data from each venue. 

Stephen, do you agree with the European Commission’s proposal to allocate equities CT revenues to national exchanges only?

The proposed revenue sharing model for equities calls into question the viability of any tape. The consolidated tape revenue allocation model should treat venues operating under each transparency model fairly.  By only compensating national stock exchanges for the data they submit to the tape, as is currently proposed – while not compensating other trading venues operating equally transparent trading services that would also be required to submit data – undermines the European Commission’s  objective of establishing a genuinely level playing field between execution venues. This approach would distort competition in trading which has served end-investors well by lowering spreads, transaction costs and increasing liquidity.

Natan, what are your thoughts on the revenue allocation model and how it can be improved?

Natan Tiefenbrun

The CT revenue sharing model should seek to fairly recognise and reward the contribution to price formation from all different contributors (not just venues). This could be done in a manner that aligns to the transparency objectives, by giving a higher weighting to trading from pre-trade transparent and multilateral mechanisms vs. others. But crucially, we think all activity to be included on the CT is contributing to price formation (or we would exclude it) – and so should receive some compensation.

If there is a concern over the viability of smaller exchanges, the revenue distribution model of the tape could be specifically tailored to protect and even enhance their market data revenues. In any case, we believe a CT would enhance the revenues of smaller exchanges because the inclusion of their data in a CT would dramatically increase the number of subscribers receiving their data – raising the profile of their listed shares to the global community of investors.

Natan, how do you answer the critiques of your peers who oppose a CT?

I don’t think their arguments have investors’ best interests at heart. Put simply – if exchanges want to argue for protectionist measures (e.g. constraints on midpoint trading) in the name of “boosting transparency” and “enhancing price formation”, they cannot also in good faith argue against a realtime, pre-trade Consolidated Tape that would dramatically improve the accessibility of market data to investors.