A consolidated tape (CT) is a mechanism that aggregates data on the price and sales volume of securities from a number of trading venues. Having access to this data allows investors to monitor market liquidity and make informed investment decisions. A CT also acts as a valuable risk and control benchmark.
The CT in the US
In the US a CT was introduced in 1976 and disseminated data from all of the major trading venues, the public US securities exchanges.
According to the SEC the CT had not kept pace with technological developments and did not provide adequate data quickly enough to market participants. This placed those market participants who could not afford the more advanced proprietary data feeds directly from the securities exchanges at a marked disadvantage to those who could afford to pay for such feeds. What had, in effect, become a tiered access model detracted from fair and efficient markets and was detrimental to overall market confidence.
Independent improvements to the CT were deemed unlikely because the securities exchanges offering the proprietary feeds were also responsible for the governance of the Consolidated Tape Association (CTA) which delivered the CT to market participants. There was no reason for the securities exchanges to make the CT better because it would become a rival to their own data products from which they derive significant revenue streams.
In response to this, in late 2020, the SEC published a rule to reform the CT. The new SEC rule requires the securities exchanges to supply more information into the consolidated feed. More importantly it opens up the CT to competition. In order to accomplish this the new rule requires the securities exchanges to make the expanded data available to all competing consolidators and aggregators who have registered with and been approved by the SEC.
The securities exchanges challenged the new rule in court even before it was finalised and at the present time it is unclear whether they will be able to hinder or force changes to the SEC’s planned reforms.
The CT in the EU
In the EU no CT currently exists. ESMA has been consulting on the subject since 2016 and the vast majority of market participants agree that it would be a good thing. The market rationale for a CT is clear and is most closely connected with market efficiency and, importantly, with making the fragmented EU securities market a more attractive place for listing and investment.
Most recently, in November 2021, the European Commission (EC), as part of its MiFIR and MiFID II review, published a proposal to remove ‘obstacles to the emergence of a consolidated tape’. The EC’s proposal is for all exchanges to contribute data to a single, ESMA appointed, consolidated tape provider for each asset class at ‘as close to real time as is technically possible’.
Although the response to the proposed rule has been broadly positive, two potentially serious flaws with the EC proposal have been identified by industry participants.
CT revenue model issues
The first, and probably the most serious, is the CT revenue model. The EC notes that one of the primary reasons why a CT does not yet exist in the EU is the absence in MiFID II of any requirements for the trading venues to provide data on ‘fair and reasonable terms’. But it is not clear what such terms might be given the relatively high cost of the individual data feeds and the market expectation that the CT would be a cheaper alternative to current aggregated options. In other words a CTP contender is unlikely to materialise unless a commercially viable model exists and a profit can be made from the operation and it is not clear whether the new rules make such a model any more achievable.
In addition the proposed commercial model redistributes CTP revenues to regulated markets only. This means that pan-European venues, which are required to supply their data as well, are not compensated for their contribution. The CBOE in particular has been scathing in its criticism of this point. There is an intrinsic friction here between the overarching objective of a CT, which is making the European market a more competitive place for securities listing and investing globally, when contrasted with the requirements of local member states to ensure that their sovereign exchanges remain viable and profitable.
Data quality and latency
The second is the issue of data quality and latency. The proposed rule stipulates the provision of data in a ‘harmonised’, transferred using a ‘high quality transmission protocol’ and ‘as close to real-time as is technically possible’. But the proposed rule does not make clear who will ensure that the data is of a high enough quality – this despite the fact that aggregating and normalising ‘bad quality data’ is one of the reasons for existing data providers ‘charging high fees for their data feeds’. Checking, normalising and cleansing data can be a complex and expensive process, particularly in scenarios where the data is of mixed quality.
Brexit, legislative process and the future
Another issue, one that is more specifically connected to liquidity, is also worth mentioning. And this is the fact that after Brexit two key markets, the UK and Switzerland, accounting for almost 35% of ETF trading for example, are outside of the EU. The UK is making its own CT a priority. This is potentially a competitor to an EU CT, which makes this latter even more critical if liquidity in EU-listed instruments is to remain on EU venues.
Given the length of the EC’s ordinary legislative procedure as well as the fact that ESMA will be required to organise and run a selection procedure for the appointment of the CT provider(s) and also create technical standards for the reporting obligations of CT contributors (which will also require approval by the EC) it is unlikely that a CT will be available in the EU before 2024. It will be interesting to see whether the UK, with its focus on reducing ‘red-tape’, can make swifter progress. Much depends on the FCA which has been tasked by the Government with setting the requirements for future consolidated tape providers.
One thing remains clear though, with the CT an area of focus in the EU, UK and US, this will be an area well worth watching in the near future – particularly as any changes to or the creation of a new CT have repercussions for many involved in the financial ecosystem.