Is there a case for a consolidated tape in the EU and UK?

Key Takeaways

• A consolidated tape could save time and resources
• Major obstacles include regulatory landscape, data formats
• Focus is on post-trade info but pre-trade is also critical

The financial landscape of Europe is undergoing a transformation. Following the UK’s exit from the European Union (EU), discussions around market fragmentation and the need for improved transparency have intensified and one potential solution gaining traction is the creation of a consolidated tape (CT).

The US has had a CT in place since 1976 that consolidates both pre- and post-trade data for the regional stock exchanges. This centralized data feed would aggregate trade information from all trading venues, offering a comprehensive picture of market activity. While the concept holds promise, a closer look reveals both advantages and potential drawbacks that need careful consideration.

Potential benefits

A major advantage of a CT lies in its ability to provide a single source for market data so that investors and traders would have a clear view of all trades happening across the EU and the UK, regardless of the trading venue. This transparency could improve price discovery, allowing for more accurate valuation of securities and could lead to a more liquid market by aggregating fragmented order books.

Currently, scattered liquidity across different venues can make it difficult for investors to find the best execution for their orders. A CT would allow them to see all available liquidity in one place, potentially leading to tighter bid-ask spreads and improved order fulfilment. With better price discovery and easier access to liquidity, a CT could potentially lead to lower trading costs for investors by eliminating the need to search for orders across multiple venues, potentially saving time and resources.

A CT could create a more level playing field for all market participants, regardless of their location. Currently, larger firms with access to sophisticated data feeds may have an advantage over smaller players, whereas a CT could democratize access to information, fostering fairer competition.

Regulators would have a more comprehensive view of trading activity with a CT, potentially making it easier to detect and deter market manipulation, which could enhance market integrity and investor confidence.

Challenges and considerations

Despite its potential benefits, implementing a CT for the EU and the UK presents several challenges.

Developing and maintaining a CT across such a diverse landscape is a complex undertaking requiring trading systems, regulatory frameworks, and data formats across various markets to be integrated seamlessly. There are inevitably gaps in the process that will need to be addressed, as no matter how good the technology is, a CT will not be able to perform any data cleansing or address incomplete or late trade reporting.

The financial burden of establishing and operating a CT would need to be carefully considered and the cost would need to be weighed against the long-term benefits for all market participants. Questions around data ownership, access, and control would need to be addressed. Who would be responsible for collecting, storing, and disseminating the data? How would costs be allocated? Establishing an efficient and transparent governance structure is crucial.

Some argue that a CT could stifle competition among trading venues, because if all trade information is readily available in one place, smaller venues might struggle to attract order flow. A balance needs to be struck between achieving transparency and maintaining a healthy competitive marketplace.

Current discussions primarily focus on post-trade data for the CT. However, some argue that pre-trade data, such as order book depth, is also crucial for market efficiency, but including this in the CT could raise additional complexity and potential for market manipulation. This has historically been an issue in the US market, where latency arbitrage is an inherent problem in the system. The difference between the speed of prices received from a direct feed versus from a consolidated feed allow traders to buy/sell when they are already aware of a market change. Visible liquidity from a real time, pre-trade tape does not necessarily mean that liquidity is accessible, as participants will only be able to access liquidity on those venues and systematic internalisers they are connected to.

The path forward

The potential benefits of a CT for the EU and the UK are significant. Increased transparency, liquidity, and investor confidence could all contribute to a more efficient and robust financial market. However, the challenges associated with implementation cannot be ignored, and the issues surrounding any pre-trade consolidation seem to discount that option for now.

The US model and the issues encountered over a significant period of time should be used to inform any decision on what works and what doesn’t so that the regulators can formulate a coherent model.

Moving forward, a collaborative approach involving regulators, exchanges, and market participants is essential, as are open discussions on data governance, technical standards, and cost allocation. Additionally, a phased approach might be beneficial, starting with a less complex asset class, such as fixed income, before expanding to equities and other asset types.

The success of a CT ultimately depends on striking the right balance between achieving transparency, fostering competition, and minimizing operational complexities. Closely observing the ongoing developments in the UK, where the Financial Conduct Authority (FCA) is working towards a CT for fixed income, could provide valuable lessons for a potential pan-European solution. By carefully considering the advantages and challenges, the EU and the UK can determine if a CT is the right path towards a more integrated and efficient financial market.