New trading venues have entered the market to offer execution services on shares across Europe, increasing market fragmentation. MiFID’s strategy for achieving a truly pan-European equity market lies in stimulating a more competitive environment. However, this strategy currently strives to deliver. Despite the industry’s commitment to make consolidated data solutions more accessible (both tape and quote)97 and provide data on a non-discriminatory basis, data remain costly, in particular for retail and small professional investors. In addition, quality and granularity of trade reports (e.g. OTC) is sometimes insufficient to generate cost-effective consolidation.
Pre and post-trade data on equity can be consolidated in two ways:98 1) through direct access to market sources99
2) through solutions offered by data vendors.100
Market data sources offer real-time information for shares traded on their systems. These data have been typically offered by incumbents (RMs) with different levels of granularity101 at a cost to final users, while new comers (MTFs) currently offer this service for free as part of their strategy to increase market share. Fees vary according to the type of user and the use they make of these data. There are currently three types of fees that are flexibly applied by trading venues (ESME, 2009a):
i) a license distribution fee, ii) a license non-display fee, and iii) a data fee.
The first type of fee is designed for data vendors that resell data with special features or together with data on other asset classes. The second one refers to the fee typically charged to investment banks and buy-side firms that directly access the market feed for their own use, typically associated with other services (co-location,102 etc.). Those fees are designed in particular for
Data accessibility
96 The LSE Group (2010) has calculated that – for off-book securities admitted to trading in their regulated market and traded under their rules – reducing the deferred publication time to the end of the day (with no exception) would mean that 27.2% of overall trade value in that market (1.4% as number of trades) would be pushed to disclose positions by the end of the day. This may create unforeseen consequences and push liquidity providers to reduce the amount of capital committed to these markets.
97 A consolidated tape solution refers to the aggregation in one virtual basket of all post-trade data of competing trading platforms in a specific market (in this case, the European Economic Area, EEA). A consolidated quote solution should potentially offer pre-trade data of all EEA trading platforms.
98 For an overview of the market for market data, please see ESME (2009a).
99 Market sources are regulated markets, MTFs and SIs that provide static pre- and post-trade data of shares admitted to trading on their systems, or investment firms publishing data with proprietary arrangements.
100 Data vendors are providers of data that typically collect a vast amount of information from several market sources and rearrange them in order to make them more easily accessible to retail and professional final users. 101 There are in general two levels of granularity: level 1 (which only includes the ‘touch price’) and level 2 (which gives a view over the order book, typically the first five best and bid offers).
102 Co-location services allow members of the trading platform to install their desks close to the central data storage of the platform in order to reduce latency and receive data at the lowest time physically possible.
algorithmic traders or investment firms that systematically use high-frequency trading tools. Finally, data fees are those charged to retail or small professional investors to access pre and/or post-trade data directly from their computers. If not freely accessible in real-time, post-trade data are typically offered for free with a delay of 15 minutes, in line with CESR’s recommendation (CESR, 2010b). Despite the fact that the average fee charged by regulated markets has partially decreased,103 the full cost (including data vendors fees and IT costs, where applicable) of access to pre- and post-trade data (full level 1 data only) remains fairly high (CESR, 2010b), in particular for small professional and retail investors. However, regulated markets freely distribute post-trade data after 15 minutes. Moreover, CESR has also recommended the full unbundling of pre- and post-trade data transparency information, which exchanges have partially implemented in recent months by splitting post-trade from pre-trade data.104 Revenues from market data are an important item of the total revenues of exchanges (see 0). A drastic cut of fees might not be manageable for them in the short term, since the collection and disclosure of data is a service that normally comes at cost for market sources.
The second way to access consolidated post- or pre-trade data is through data vendors, which pay distribution fees to exchanges and resell data in a consolidated fashion. Since the costs of accessing several trading venues are high, end investors may opt for one-stop-shop solution, even though it may not offer the same depth and quality as the direct market feed. However, the costs of one-stop data vending solution seem to be high as well. Unbundling of services in this market may substantially reduce costs for end users, however. In effect, a right to access single offered services on a non-discriminatory basis may reduce costs for non-sophisticated end users and allow data vendors to generate significant economies of scale and scope by aggregating data from several asset classes. This change would stimulate further competition105 and potentially drive overall costs down further over the long term. In effect, concentration is rather high in the current market setting. Two players, Bloomberg and Thomson Reuters, capture two-thirds of the demand taking into account the whole market, including data from asset classes other than equity (see Figure 11). The market share of these two players is higher if only equity market data is considered. The whole market for equity data sales and trading is roughly $4.45 billion, of which $1.8 billion in Europe (Burton-Taylor, 2010). Also in this market, the offer is typically done through cross-selling practices (bundling or tying)106, which allow partial market segmentation. In
103 The fee for the ‘last trade’ price charged by major exchanges (95% of EEA lit books current volumes, but not as % of listed shares) is currently €75 per month. The full cost to access a consolidated tape and quote solution in the US is roughly €70 per month. However, the US data solution does not only offer ‘last trade’ prices, but complete pre- and post-trade data (levels 1 and 2), including the Best and Bid Offer (BBO), and covers 100% of listed shares. To have only the level 1 pre- and post-trade data service in Europe for all EEA markets, the price is around €409 per month (Atradia, 2010).
104 See FESE press release, http://www.fese.be/en/?inc=news&id=141.
105 Bundling increases the specificity of the product, reducing its homogeneity. Competitors will ultimately find it more difficult to compete with a bundle of several data services, with no possibility to compete with single data services.
106 Tying is a widespread business practice that occurs when two or more products are sold together in a package and at least one of these products is not sold separately. In this case, the end user would be able to buy the tied product alone, but not the tying product without the tied one. Bundling occurs when none of the components of
addition, a lack of standardisation of data formats between data vendors impedes interaction and does not allow users to access separate services of data providers from the same IT platform.
Figure 11. Data vendors’ market shares (all asset classes)
Thomson Reuters 39% Bloomberg 27% IDC 2% FactSet 2% Moody's Analytics 2% S&P/CaplQ 1% Dow Jones 1% SIX Telecure 4% Morningstar 1% Other 21% Source: Atradia (2010).
The combined effects of unbundling data services and fees for exchanges and data vendors may reduce overall costs for final users that seek pan- European consolidated data solutions.
Although MiFID harmonised transparency requirements among member states, the quality of market data has partially deteriorated in some areas, mainly due to the combined effect of market fragmentation and incomplete specification and implementation of reporting requirements (CESR, 2010b; see 0). Several aspects, however, affect the quality of data and its eligibility for consolidation (ESME, 2009a):
1) quotes should be executable and not indicative only,
2) data should be delivered on real-time, with no delay (except where waivers and calibration apply),
3) data should refer to liquid markets, and
4) data formats and flags should be sufficiently standardised.
In particular, the use of diverse trade flags107 does not allow an easy consolidation of data. The objective should be the reduction of flags to less than 10 across all European trading venues. Moreover, on the one hand, the insufficient granularity and monitoring of OTC reporting increases the risk of misreporting and the uncertainty around quality of price formation and of best execution (see Section 5.4.1). On the other hand, trade reporting obligations
Data quality
the package is sold separately, and components are offered in fixed proportions. It is the simultaneous sale of two or more products as a package, with no possibility to purchase both or one of them individually. For a more detailed analysis, see CEPS and Van Djik Consultants (2009), “Tying and other potentially unfair commercial practices in the retail financial service sector”, a study submitted to the European Commission, 24 November (http://ec.europa.eu/internal_market/consultations/docs/2010/tying/report_en.pdf).
107 A ‘flag’ is a code attached to the information on a trade that signals its status and/or the venue where the trade has been executed. The Report will refer to ‘flags’ more simply as codes for venue identification.
under MiFID create a serious issue of duplicative reporting (see example in 0), which impedes an assessment of the actual size and shape of the market.
In order to improve data accessibility and reliability, CESR proposed to publish post-trade information through Approved Publication Arrangements (APAs), which can be RMs, MTFs, organised trading facilities (OTFs) or other operators (but not an investment firm itself). In this way, trading venues would compete with data vendors for the provision of market data to consolidators.108 In order to facilitate data consolidation, APAs should define stricter requirements, approved and monitored by competent authorities. However, it is fundamental that APAs are designed around harmonised standards109 in order to reduce differences in the definition and implementation of APAs across the EEA. These requirements should minimise issues of double-counting and misreporting. The Commission (2010b, pp. 31-32) proposed to introduce criteria such as: high data security standards; access to data at a ‘reasonable’ cost and on a non-discriminatory basis; procedures to identify erroneous trade reports; adequate resources and contingency arrangements; and conflicts of interest procedures.
In addition, CESR (2010g) proposed two options:
i) To prescribe only standards that data sources (RMs, MTFs, APAs) would need to use to disseminate post-trade data to end users and
ii) To prescribe not only those standards, but also a common message protocol for the transfer of post-trade data by RMs, MTFs and APAs. The second option carries higher costs for data sources, which may need to be further assessed. In any case, full harmonisation would make data consolidation easier, since there would be “no requirement for data consolidators to map the data they receive into their own standard” (CESR, 2010g, p. 6).
APAs
Whether or not a new APA regime is effectively implemented, CESR believes that a set of requirements should be inserted in MiFID in order to provide easily accessible and less costly consolidated market data solutions in the EEA. This proposal is called ‘EU Mandatory Consolidated Tape’ (MCT). Consolidated tapes should be designed by the industry and disclose post-trade information on shares admitted to trading on RMs or MTFs in the EEA, wherever the execution of the trade takes place. All information should come from RMs, MTFs or APA real-time and fully unbundled. Data will be then consolidated and sold at a ‘competitive price’ by a given operator, who will meet strict requirements and be responsible for the detection of multiple publications (double reporting or counting). Only if the industry does not
Mandatory Consolidated Tape
108 NYSE Euronext has recently announced the intention to introduce a consolidated tape with real-time post- trade data of all regulated markets, MTFs and OTC markets. See, http://www.euronext.com/news/ press_release/press_release-1731-FR.html?docid=929763.
109 In order to reduce inconsistencies in trade and transaction reporting across asset classes, free international open (i.e, non-proprietary) industry standards – such as those developed by the industry in line with the ISO 20022 standard (Universal financial industry message scheme) – may offer a high degree of reliability, transparency and standardisation to ultimately enable data comparability and analysis by authorities with the possibility – if needed – to adapt them to the characteristics of the market. Moreover, the introduction of universal standards may reduce the risk of market segmentation and ensure a more competitive and harmonised environment. CESR (2010g) has proposed the introduction of ISO standards for post-trade publication fields.
deliver this solution by itself, should ESMA adopt the necessary arrangements to set a US-style consolidated tape in the EU, run by a non-profit entity. MiFID should give enough powers to ESMA to act accordingly. The Commission (2010b, p. 34) proposed that a European MCT could be structured in different ways, under variable degrees of regulatory intervention. The proposal favours the creation of a consolidated tape for all financial instruments – instead of only equities – admitted to trading in the EEA, wherever the execution takes place. It should be noted however that building a tape for assets other than shares would be difficult to achieve in the short term, since a consistent and harmonised regime of post-trade transparency for non-equity financial instruments does not exist yet. MiFID should ensure that data consolidators would be able to collect all tapes and provide one access point to end investors. A market-led solution would probably be the least costly and most efficient option (Option C). Competition among data providers would be the best way to spur the creation of consolidated data solutions outside equity markets. The Commission is concerned about the cost of data, which it wants to keep under ‘reasonable’ bounds. However, what constitutes reasonable pricing is difficult, if not impossible, to define in practice. Instead, the Commission should aim at ensuring ‘competitive’ pricing. Only real competition between data providers would keep costs at a ‘reasonable’ level. The Commission’s attempt (2010b, p. 34) to impose a single no-profit or for-profit entity (Options A and B) for the provision of the consolidated tape would not lead to ‘competitive’ pricing, but would only impose a risky price regulation. Rather, it would ultimately define costs for end investors by splitting revenues among trading platforms and APAs, which could create inefficiencies and distort trading incentives (as showed by the US experience, see Box 4 below). Furthermore, the Commission’s proposal to require APA’s to be expressly authorised for the provision of consolidated tapes would slow down the whole process and ultimately reduce incentives to compete. In sum, achieving minimum consistency though industry cooperation would probably be more efficient than strong regulatory intervention. In this regard, ESMA should rather support current industry-led initiatives to major impediments to cheaper and more efficient solutions. However, either the Commission or ESMA should be able to impose consistency if commercial initiatives do not lead to a satisfactory solution in a reasonable time frame.
Box 4. The US consolidated tape and quote
The US consolidated tape system was officially created in 1976 by the National Market System in an effort to promote economic efficiency and allow brokers to deliver best execution (Caglio & Mayhew, 2009). Three networks (A, B and C) - respectively run by NYSE, AMEX and NASDAQ – display real-time trade reports (Consolidated Tape System) and market quotes (Consolidated Quotation System). The published information refers to securities traded on all exchanges, regional markets, electronic crossing networks (ECNs) and broker-dealer crossing networks and collected through three different networks by dividing shares listed on national and regional exchanges (Networks A and B) and NASDAQ National Market and Small Cap (Network C). Networks A and B are governed by the Consolidated Tape Association Plan (CTA) and the Consolidated Quotation Plan (CQ), while network C is governed by the OTC/UTP Plan. These plans collect fees charged for the access to the consolidated tape and quotation and distribute them across all primary markets, in
line with a defined allocation formula.
Prior to 2007, at least half of the revenues from network A and B were distributed in proportion to the number of reported trades, while Network C redistributed half of its revenues in relation to the number of trades and half as a proportion of the volume of trades in those shares. The allocation formula boosted a widespread rebate programme through which exchanges pushed their members to split their orders even though there was no risk of market impact. In effect, this system created strong incentives to generate volumes, to print trades. The implementation of RegNMS110 in April 2007 modified this allocation formula by splitting revenues as follows: 25% depending on the number of shares, 25% on the number of trades, and 50% on quote aggressiveness, i.e. frequently displaying better prices and thereby helping to narrow quoted spreads, while distinguishing manually displayed quotation systems. The introduction of this formula was followed by the SEC requesting the exchanges to adopt a rule against tape shredding.111 Both these policies have helped to partially increase the average trade size (Caglio & Mayhew, 2009), which proves that the allocation formula does influence current trading activities and raises a trade-off between control over data consolidation and indirect incentives on trading. Moreover, since the introduction of this formula, the average number of quotes displayed every minute has constantly increased (see figure below). Soaring trading volumes and algorithmic trading (Angel et. al., 2010) may not be the only explanation for this later effect. Hence, the impact of this new allocation rule deserves further investigation.
Figure 12. Average quotes per minute
0 100 200 300 400 500 600 2003 2004 2005 2006 2007 2008 2009 NASDAQ‐listed NYSE‐listed Russell 2000 S&P500
Source: Angel et al. (2010).
In addition to these networks, – in March 2007 – the SEC established Trade Reporting Facilities (TRF), which report directly to the consolidated tape any trades executed on venues other than national and regional exchanges.
110 Securities and Exchange Commission (SEC), Release No. 34-51808; File No. S7-10-04, April 2007, Rule 601 and 603.
111 Members of exchanges can break up their customers’ orders into smaller trades only for compliance with best execution obligation (best price).
Conclusion # 8
In the post-MiFID era, several aspects have reduced the quality of data and hindered consolidation. In order to improve this situation, the MiFID Review should look both at the standardisation of data formats (code identifiers, etc.) and data granularity through flags. The relevance of trade flags comes from the support they offer to liquidity discovery mechanisms across trading venues. Market initiatives should reduce the number of trade