• A consolidated tape will benefit all investors but is proving to be slow burn
  • This will improve transparency, assist decision-making and provide market insights
  • A consolidated tape will benefit end-investors of all types

Liquidity. Equality. Fragility. With apologies to the French Republic, these three words almost act as a lodestone in discussions about a consolidated tape (CT) for EU securities. The need for such a tape is becoming more apparent than ever, but it could still be three years or so before it become a reality, according to Susan Yavari, regulatory policy adviser at the European Fund and Asset Management Association (EFAMA) and the author of a detailed official position paper on the subject published in mid-February.

Stuart Campbell, head of trading at fixed-income specialist BlueBay Asset Management, part of RBC Asset Management, says: “We’ve been hoping to see an EU consolidated tape for some time, and cannot quite fathom the underlying reasons for the continuing delays. We want to see improved liquidity, and while existing arrangements work for small trades, big positions can take several days to process. But it is a very slow burn, with hesitancy on display on both the buy-side and the sell-side.”

Elizabeth Callaghan, director in the market practice and regulatory policy team at the International Capital Market Association (ICMA), says a consolidated tape will provide a consolidated overview of bond markets. This will improve transparency, assist decision-making, and provide market insights to end-investors, large or small, institutional or retail.

“There is no mechanism that aggregates the fragmented post-trade data, experienced today in bond markets, into one ‘golden source’,” she says.

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“Currently there is a bond consolidated tape in the US (TRACE) but not in Europe. The proposed European bond CT will lay the groundwork for a more competitive European bond market. 

“Buy-sides want more control over trades. The post-trade execution data provides information and information enables buy-sides to have more control over price negotiation with their counterparties.

“Today there is no… dependable authoritative source for execution prices,” Callaghan says. “Price information is fragmented, which means market participants only rely on one or two post-trade sources or they pay an aggregator for the consolidated post-trade data. Aggregators are very expensive and not available to every market participant. 

“Aggregators are increasing as APAs [approved publication arrangements, or trade reporting entities] are improving the machine readability of their data output. These aggregators have varied characteristics. Some are enriching analytical providers, while others provide a service that is more technical in nature, and some are data normalisers redistributing raw post-trade data.”

A CT levels the playing field with respect to access to information, she adds. A post-trade CT removes existing information asymmetries where certain market participants may have greater visibility regarding ongoing trading activity than others. This enables them to assess more accurately current market dynamics, which increases overall investor confidence, particularly in times of market volatility.

More specifically, the accuracy and immediacy of fund valuations is directly contingent on the ability to value accurately the underlying securities. Improved transparency in bond markets will help managers to maintain accurate valuations of their fixed-income funds. This equally applies to fixed income exchange-traded funds (ETFs) and would help to maintain a closer relationship between the net asset value (NAV) of the underlying fund and the price of the related ETF through better facilitation of the creation and redemption process, Callaghan explains.

The EFAMA paper takes as its starting point the European Commission’s (EC) proposal on markets in financial instruments regulation (MiFIR), published on November 25 2021. That proposal establishes the blueprint for a European consolidated tape providing real-time trading data from across the EU27 from both primary markets (national exchanges) and alternative trading venues, enabling a single security to trade on multiple platforms across the EU. 

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In its review, the EC states that financial instruments, such as shares and bonds, are traded in the EU across about 500 execution platforms (covering all asset classes). All these platforms need to publish information about each transaction, such as the volume, time and price of the transaction. This makes the information very fragmented and only a few big players are able to have a comprehensive overview of the market, notes the Commission. 

EFAMA stresses that to make informed decisions and obtain the best prices (best execution) investors require access at a reasonable cost to real-time trading data such as prices and volumes. 

In the absence of a consolidated tape, investors must build their own view on the liquidity and trading opportunities across the EU. The largest asset managers can do this at considerable cost by aggregating different individual data feeds that they subscribe to, says EFAMA. This is sub-optimal, costly and inefficient. Smaller asset managers and retail investors, with smaller or zero budgets for data feeds are simply operating with limited information. Clearly there is an uneven playing field for investors accessing critical market data. EFAMA identifies as another shortcoming of the system the inability of issuers to have their securities be ‘seen’ by investors. 

A tool to democratise capital markets

The EFAMA position paper makes it clear that a consolidated tape forms an essential element of capital markets union.

IPE therefore asked the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) to discuss the topic from a buy-side perspective. Because of the Russia-Ukraine conflict, no-one at DG FISMA was available for an interview, but the Commission made a statement, which we have condensed here:

The consolidated tape is a centralised database that will provide easy access to consolidated market data to all investors, large and small (asset managers, pension funds, retail investors), and to financial intermediaries, such as brokers.

An EU consolidated tape would provide investors with information on whether they obtained the best price for selling or buying securities. It could also improve competition between trading venues, by attracting orders to trading facilities with better prices and better liquidity. Since the consolidated tape will also be available to retail investors, it will contribute to the democratisation of trading in the EU and increase the participation of citizens in capital markets.

Better information on prices for financial investments in shares, ETFs, bonds and derivatives will make the EU more attractive for international investors.

The proposal aims to change trading rules to enhance transparency in EU financial markets and level the playing field between execution platforms. Small trades in equities will be banned from being executed in ‘dark pools’ (where traders are not subject to transparency requirements). When they are executed via large investment banks, they should be made fully transparent.

Furthermore, for non-equities (such as derivatives and bonds), transparency will be significantly increased by reducing recourse to so-called deferrals that allow for the delayed publication of core details of transactions. These measures improve the price formation process and increase the level playing field between various execution platforms. The practice where retail brokers forward the orders from their clients to a limited number of traders in exchange for compensation (payment for order flow or PFOF) will be banned. This will ensure that brokers are acting in the best interests of their clients.

Another key objective of the proposal is to strengthen the competitiveness of EU financial markets by removing the open access obligation for exchange- traded derivatives and by adjusting the scope of the EU share trading obliga- tion and derivatives trading obligation.

The consolidated tape will not negatively affect the business model of stock exchanges. This new tool could constitute a big opportunity by offering a consolidated view of the entire European markets that today is not widely available, making European trading more attractive and dynamic.

The consolidated tape will reduce the advantage that the biggest market players enjoy over the rest of the market, which includes not only retail investors but also smaller European asset managers and banks, which represent the majority of institutional investors.

EFAMA says it fully supports most aspects of the  consolidated tape proposal, including: as close to real-time delivery of data as possible (meaning millisecond range for equities, and minute speeds for bonds); mandatory contribution by trading venues, approved publication arrangements (APAs) and systematic internalisers; voluntary consumption of the consolidated; a single CT provider model; and consolidated tapes for multiple asset classes.

At the same time, it voices important reservations about the proposed revenue model for the consolidated tape providers. Also, while data quality issues can be addressed through the proposed data expert group, there is a need for an explicitly defined market surveillance body to enforce data standards and deter/reduce the provision of poor quality data.

There are notable differences between bond and equity data, says Yavari at EFAMA. Mercedes-Benz shares, for example, might trade on several different venues and if an investor connects to them all, they will have the essential data on trade size and pricing. But bond data is more elusive. 

“On bonds there are a much greater number of instruments trading across more venues, the comparability of data is poor, and there is no consolidated view on any given instrument,” Yavari explains. “The creation of a consolidated tape will mean a greater understanding of liquidity for investors, lower risk and greater efficiency and will democratise investor access to raw data.”

That means smaller investors will – in theory at least – gain broadly similar access to that enjoyed by larger investors. Part of the knock-on effects should be greater availability of equity capital to smaller issuers and would-be issuers. Such a tape will also encourage investors from Asia, Latin America and other regions who currently favour the US market to switch at least some of their trading activity to the EU.