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Creating a Consolidated Tape: Easier Said than Done
December 15, 2010
As European securities regulators review the impact of legislation adopted three years ago to spur creating of competing markets, they are now grappling with one of the after effects:
How to best develop a consolidated tape and who should operate it.
As is the case in the United States, the goal of a European consolidated tape would be to reduce the legal and market risks buy and sell-side firms face in not understanding whether or not they are getting the best deal for their customers.
The Markets in Financial Instruments Directive, adopted in 2007, requires brokers to get the “best execution” of their orders. That means the best price to execute their orders with the lowest implicit costs.
The good news: the legislation paved the way for dozens of multilateral trading facilities, dark pools and broker-dealer operated networks to compete with incumbent exchanges.
The bad news: MiFID eliminated the requirement for financial firms to report trades to their domestic exchanges, so they can now report just about on any public venue, meaning multiple authorized venues. And because MiFID is based on principles rather than exact rules, the trading facilities can use their own practices and formats for disclosing price and trade data.
“The executed trades may be reported with different data elements and different flags to indicate the type of trade,” explains Sophia Kandylaki, director of Markit Boat, a London-based trade reporting facility for European over-the-counter equity transactions.
Trade reporting facilities such as Markit Boat were set up to provide firms with a way to publish their trades executed either over-the-counter or in dark pools. The London Stock Exchange, NYSE Euronext, Deutsche Borse and Nasdaq OMX Group offer similar services.
But it is pretty much impossible to determine whether trades were conducted manually or through a broker’s internal dark pool. “There is also a lack of detail on the types of OTC trades that are reported which means that the OTC data includes activity the buy side cannot interact with,” says Kandylaki. “Those trades include give-ups or hedging transactions.”
The Committee of European Securities Regulators (CESR), which is set to transform into the new more influential European Supervisory Markets Authority in January, has offered two alternatives for how to improve post-trade transparency as it deliberates a major overhaul to MiFID – a process it has coined MiFID II. The securities industry can either come up with its own proposals for one or more commercially driven data distribution utility or CESR will mandate one.
The commercial option involves the creation of approved publication arrangements (APAs) which would have to clean and standardize data. Similar to the current Trade Data Monitor regime under which firms such as Markit Boat were established, APAs would process post-trade data in a common format.
A mandated approach would still result in the creation of APAs but all exchanges, MTFs and APAs would have to send post-trade data would have to be sent free of charge to a consolidator selected through a tender offer. The not-for-profit mandated consolidated tape provider would make its data available for free after 15 minutes. The only charges would be for real-time data; profits go back to data providers. In either case, a consolidated tape would have to meet the principles of a reasonable cost, low latency and data standards prescribed by CESR.