Here is a piece that I published in the International Financial Law Review. It discusses the creation of a 'consolidated tape', a technological solution to improve trading, that is underway in the EU and in the UK Government's plans. I outline some of the challenges and the consequences: regulators taking more powers to intervene in prices and the state taking a larger role in private markets.
The Consolidated Tape is a turning point for financial regulation
The consolidated tape is the ghost that has haunted European capital markets since pan-European regulations were conceived.
The United States introduced its consolidated tape (the Trade Reporting and Compliance Engine or TRACE) for corporate bonds in 2002. European policymakers have long envied TRACE with a weight of symbolism: a proper Single Market should be capable of creating a pan-jurisdictional trading system with a single source of price discovery and trade reporting.
In 2007, the original MiFID took steps to creating a single capital market regime, but at the same time, the regulations embedded the status of national exchanges, and with it, the fragmentation of market data. MiFID II sought to address some of these issues in 2014, making it possible for regulators to approve a consolidated tape provider (CTP). However, several practical and commercial barriers mean that a pan-EU consolidated tape has not yet become a reality. Although that looks set to change.
The EU is close to reaching a final agreement on the reforms to MiFID II that will seek to make the creation of a consolidated tape likely. The big question is whether the agreement will achieve the hopes of many in the market, exorcising the fears of fragmentation once and for all, or whether the regulations will fall flat.
Regardless, reaching a political agreement on this long-standing issue signals a broader shift in financial regulation – a shift closer towards price regulation – and broader trends in macro-economics, away from public versus private sector and towards more public-private cooperation.
Is a consolidated tape needed?
A consolidated tape is an electronic ticker tape, a system for near real-time data about trades conducted on public exchanges, and the information is disclosed to market participants. Increased transparency about the price and volume of trades means that participants are better able to analyse the market and seek out the best trades. In turn, this means reduced liquidity risk and settlement risk for market participants, and an improvement in the allocation of capital to the class of assets covered by the consolidated tape.
In the EU, a consolidated tape could also help overcome the previously mentioned problem of fragmentation by facilitating higher levels of cross-border trading.
The benefits will be broadly commensurate with how comprehensive, standardised, and consistent the consolidated tape is and how close to real-time the data that market participants receive is. As we will see, both criteria are crucial to evaluating whether the EU and the separate UK policies will achieve their aims.
A consolidated tape could be created for equities, fixed income, derivatives, or any or all these asset classes. Some studies suggest, based on the evidence from the US, that the economic benefits would be greatest for fixed income. This is because trading in debt is more opaque than trading in shares, with a greater proportion of trades occurring OTC and not on public exchanges.
The creation of a consolidated tape has several broad requirements: technical, governance, and most importantly, the commercial incentives. Regulation can clarify these requirements and provide an incentive for market participants to create a consolidated tape – but for good reasons, governments themselves are not willing to create and administer a consolidated tape as a public utility.
While there are economy-wide benefits in more efficient trading, cross-border trade and economic growth, the creation of a consolidated tape is disruptive to the current market. There are costs for some businesses, not least the large national exchanges, and regulators must find a way to address and allocate those costs.
The end stage: economic trade-offs
At the time of writing, the EU’s institutions are hammering out a compromise text that would become law.
The EU’s proposals address issues relating to the administration of CTPs, their organisation and reporting requirements, such as data collection and harmonised reporting by entities such as trading venues and investment firms to the CTPs. The reforms have run into challenges in commercial incentives.
Asset managers and institutional investors have, unsurprisingly, been enthusiastic supporters of the consolidated tape. Investors are currently hampered by the high costs of accessing market data, partly due to opacity and a lack of competition in the provision of market data. The provision of data in a standardised format to a CTP should resolve some of these issues, making market data cheaper and more accessible to investors. However, trading venues make money from market data. Under the new regulations, these exchanges would be required to hand over their data to a CTP.
The regulations envisage revenue sharing models, but it is not clear how these models would work and how the interests of the various participants should be remunerated. The asset managers insist that market participants would access the consolidated tape on a fair commercial basis, thereby ensuring that the exchanges are paid. But the trading venues are understandably cautious about losing a non-trivial revenue stream. The challenges around pricing and remuneration reflect broader issues around governance of the consolidated tape; namely, balancing the rights and responsibilities of the different parties involved.
As we reach the end stage, the Member States in the European Council are backing their national exchanges. A proposed solution is for a delayed tape, encompassing only post-trade data. This would preserve value for the exchanges, but critics say that moving away from real-time reporting would undermine the value and purpose of a consolidated tape.
Nonetheless, a consolidated tape for equities is likely with several groups of exchanges preparing to bid for the CTP license. The question is whether its form will be closer to the demands of investors or of the trade venues.
Broader trends
The creation of a consolidated tape illustrates several more general points:
- Price regulation edges closer. While regulators have traditionally avoided the perception of being price regulators, the consolidated tape has forced them to wade into commercial incentives and fee models. Elsewhere, we are seeing the concept of “undue costs” being introduced into fund regulation, while the cost of living and economic conditions tighten.
- Regulatory competition is a reality in Europe. While EU policymakers look to the US consolidated tape, the UK Government has committed to its own version “by 2024” and is seeking to learn from the EU’s policy dilemmas. UK policymakers are said to favour allowing multiple CTPs, promoting competition within each asset class, but critics argue that this would lose the benefits of a single source for data. Elsewhere, we have seen the EU propose its own version of the UK’s product value assessment and an inducements ban, while the UK is designing its own take on the EU’s sustainable finance regulations.
- Macro-economic shifts are underway, more than a decade after the global financial crisis. In economic theory, classical fundamentals like the efficient market hypothesis are increasingly under attack. In practice, governments are becoming more willing to intervene in markets and co-operate with private businesses (e.g., the large subsidies in the US Inflation Reduction Act or the smaller co-investment proposals in the UK’s Long-term Investment for Technology and Science). However, a significant intervention in markets such as creating a CTP – effectively a monopoly – provokes a trade-off for policymakers, whether to favour current incumbents or to open up the prospects for broader, longer-term economic growth.
