Risk Management: In the Eye of the Storm
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December 15, 2010
At least two of the stumbling blocks to creating a consolidated tape appear to be slowly addressed. CESR has suggested the creation of seven flags used to identify different types of trades in post-trade data and it has recommended the use of International Securities Organization-compliant identification codes to identify the type of financial asset and the exchange or trading venue in which it is listed. European exchanges have also agreed to unbundle their pre and post-trade data rather than sell it only in a more expensive combined package.
While some commercial vendors such as Thomson Reuters, Bloomberg, and Fixnetix are trying to fill the gap by creating their own versions of consolidated tapes. But there are discrepancies in data formats and standards. “Data users need all the pieces of the jigsaw in order to see the whole picture so, the argument goes, the suppliers of the data feel that users will simply have to pay whatever the price is charged for the missing pieces,” says Michael Sparkes, director of ITG’s London office heading its post-trade consulting business.
Stuart Adams, the regional director of EMEA for FPL, touts the benefits of using FIX standards as the technical basis for any consolidated tape “On a global basis, FIX is increasingly seen as the mechanism that regulators can look to when framing new legislation of this kind,” says Adams. “Because the use of FIX is already widespread across Europe, the cost of implementing a FIX-based consolidated tape will be lower than alternative approaches.”
However, FPL is not interested in operating the consolidated tape itself. Under its proposal, it would create a governing body of buy and sell side firms, to ensure that CESR’s standards are met for the so-called Consolidated Tape Delivery Authority. Once established, the CTDA would appoint the operator of the consolidated tape through a request for proposals process.
“If CESR and the European Commission agree with this proposed structure and include the provision of a not-for-profit CTDA in the revised legislation, it would appear to be a one-horse race as far as appointing FPL to that position is concerned,” says Sparkes.
Steve Grob, director of group strategy for order management platform Fidessa in London, also advocates the adoption of FPL’s proposal. “It’s the best way forward for an industry-led solution. Given that the issue is really all about agreeing and promulgating an industry standard, then this sounds like easy territory for the FPL chaps,” he says.
However, as Grob notes without an agreed syntax for describing trade types and a universal mechanism to avoid double counting, the net result will be more rather than less confusion once again. And still to be determined is how CESR defines “reasonable costs” and low latency for the ECT.
In the U.S., the Securities and Exchange Commission mandates that brokers subscribe to data from all markets to meet best execution requirements. As a result, the cost of the consolidated tape is controlled by the SEC to ensure it is available at reasonable cost.
Naturally, commercial vendors are eager to maintain their own turf. Thomson Reuters, for one, insists there should be multiple operators of a consolidated tape rather than a single one. “There could be competition on price and the mechanisms for delivering the data,” says Andrew Allwright, business manager for MIFID solutions at Thomson Reuters. “A single mandated provider would inhibit innovation and promote higher costs.”