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Europe's Challenge

Creating a Consolidated Tape: Easier Said than Done

December 15, 2010
By Chris Kentouris

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.

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.”

Allwright says that a new service offered by Thomson Reuters next year will complement its existing post-trade consolidated tape on a 15 minute delayed basis for 1,800 European stocks. The new product which anticipates the adoption of CESR’s trading flags, will offer real-time post-trade data on 6,436 stocks recognized by CESR as “trades admitted for trading on European Union regulated markets”

Still Allwright anticipates that firms wanting to use consolidated data to prove they have met MIFID’s best execution requirements will use Thomson Reuters’ 15-minute delayed data. NYSE Technologies says that its post-trade data will also be available in real-time and 15-minute delayed formats.

“A [delayed] Tape of Record is a very simple and practical application of the newly-defined standards that address transparency issues in a manner very similar to what investors already know today as time and sales,” says Mark Schaedel, global head of data products for NYSE Technologies. ”While there is no single source for time and sales data today it informs investors with a consistent view of the markets.”


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