A consolidated tape, bringing together all available data on securities, will make markets more competitive and transparent. The FCA should bring it forward now, says Giovanni Cespa
Transparency in market data is universally seen “as a good thing”. However, moves to develop and implement a tool that will address a glaring lacuna in market data transparency have been painfully slow in both the UK and the EU.
The Financial Conduct Authority pledged last year to publish tender documentation for development of a ‘consolidated tape’ by the end of January, but has since pushed back the deadline.
A consolidated tape is a centralised feed of data that aggregates information on the available prices and volumes for the securities that trade in different venues. It can provide information on trades before they occur and/or on completed deals (pre- or post-trade tape).
European markets (including the UK’s) have needed such a tool since implementation of the Market in Financial Instruments Directive (MiFID) in 2007.
MiFID made redundant the so-called “concentration rule”, allowing the trading of a stock away from its original listing venue, thereby encouraging competition for trading services. This has created many, dispersed trading venues where the same security is available at potentially different prices (and in different quantities). So, in the absence of a feed that aggregates such information, market participants can miss out on profitable opportunities.
Theoretical and empirical analysis has shown that better pre-trade transparency reduces trading costs, increases liquidity and allows investors to better assess how well their brokers are fulfilling their requests.
The Financial Conduct Authority (FCA) has been consulting with market stakeholders about the technical aspects of developing a consolidated tape.
It wants to implement a pre-trade tape by mid-2028 but the tendering process has not gone entirely smoothly – and the tape will initially only apply to bond markets. It is still considering how to deliver one for equities and ETFs.
Levelling the playing field
The FCA is clear about the value of the tool in levelling the playing field around market data.
On its website, the regulator declares: “It (a CT) will bring together trades executed on trading venues as well as those arranged over-the-counter. We expect a CT to strengthen UK markets by making them more transparent and liquid.”
The European Securities and Markets Authority is only now in the process of establishing a CT that will make public the price of every bond trade in the Eurozone.
Long consultations and tendering processes risk slowing down the introduction of CTs – not least because different parties may have vested interests in the status quo.
Over the last 20 years it has become obvious that market data is an essential input for market participants. Without fast connectivity to matching engines and the ability to react to the data that exchanges produce, liquidity providers cannot work.
Exchanges know this all too well. They thrive on a business model that prioritises revenue from data sales over what most would think is their core role – trading.
This means that they often exert considerable market power in data pricing – a cost that is borne by those who supply liquidity. These higher market data costs are therefore unlikely to improve market liquidity.
In this respect, the unavailability of a competitive “alternative” to direct market access should be of real concern to retail traders.
In the UK the FCA must act quickly to deliver the CT for the bond markets and pursue an equivalent for equities and ETFs without delay. It should be wary of faux concerns raised by market players with a vested interest in protecting a revenue stream funded by liquidity providers and – ultimately – by retail investors.
A CT can exert competitive pressure on exchanges and make markets more liquid. A good regulator should move as fast as the practicalities allow to deliver such positive outcomes.
Giovanni Cespa is a professor of finance at Bayes business school