A ticker tape for every single trade in stocks and bonds in Europe. That idea is part of the EU’s long-term ambitions for a Capital Markets Union, a plan being launched in fits and starts. With the endorsement of almost all European stock exchanges, the “consolidated tape” recently booked significant progress. Hurdles remains however, as representatives of stock exchanges - Fese - and asset managers -Efama - remain at loggerheads.
Europe’s effort to reduce trading market fragmentation and ensure that European capital markets remain globally competitive through creating a common source of data on equity and bond transactions has been endorsed by many of the European stock exchanges whose involvement - and data - are key to its eventual success. Many details, however, remain to be ironed out and doubts about the ability of better information alone to achieve these goals have been raised.
Fourteen European exchanges from 26 EU member states, all but Slovakia, have announced a joint venture to create a “consolidated tape” for equities - which has been proposed as a ticker tape showing pre- and post-trade prices and volumes for tradeable securities. The exchanges said their project, which focuses on equities, responds to a European Commission proposal for such a tape to “contribute to the development of the Capital Markets Union.” That project seeks to move Europe towards more risk-based finance and encourage savers to invest.
Such a consolidated tape is seen as being able to reduce fragmentation and improve the functioning of financial markets. This area is nevertheless rife with efforts to “front-run” trades and gain advantage over usually less wealthy traders, even with only short time advantage, or by restricting access to trades.
Various strategies
Various strategies have emerged, whether the “systematic internalisers”, investment funds who regularly withhold orders from public trading venues such as exchanges to offer them by themselves, or “payment for order flow”, known by the acronym PFOF, a concept which has dominated discussions at the EU level on regulating trading markets for some time. This involves market makers - entities which are at all times active in buying and selling securities - paying brokerage firms to route orders to them.
The Federation of European Securities Exchanges (Fese) - a group representing stock exchanges in Brussels, has taken issue with the EU’s emphasis on the consolidated tape as the main solution to the market fragmentation issues.
“We think the consolidated tape is very helpful, if it will allow us to get a transparent, high-quality, reliable, and consistent view of 100% of the market activity,” said Fese director general Rainer Riess in an interview. “But with all pre-trade elements not calibrated with market structure we simply will create loopholes and front running possibilities.”
Market structure matters
Policy progress on market structure issues has proved more intractable than the consolidated tape issue.
“Unfortunately, Council and Parliament have not really discussed market structure in detail, yet market structure matters most for the competitiveness of EU markets, liquidity and the success of the CMU project,” said Riess. “They’ve spent most of the time discussing PFOF and a little bit on the consolidated tape.”
He continued: “Europe risks missing the boat on this entire issue of really getting market structure right, especially how to regulate that smaller order flows cannot be syphoned off and be internalised, weakening price formation and liquidity of EU markets. Internalising small order flow is basically a free lunch for investment banks and market makers on the back of the retail investor and transparency of the entire market.”
Fese pointed to experience in the United States, which already has this kind of ticker tape, “is seeing a large proportion of flows conducted via dark venues.”
‘Institutionalized front running’
Efama, the association representing fund and asset managers, is often critical of the exchanges yet has welcomed the move, although it raised concerns about their interests.
“It is important that the resulting equities tape displays both pre-and post-trade equities/ETF data in real-time,” Tanguy van de Werve, Efama’s director general, said in a statement. In terms of pre-trade data, Fese accused Efama’s focus on pre-trade data of being about its interest in cheaper access to the exchanges data, but warned this ran the risk of encouraging “institutionalised front-running.” Front-running is an illegal practice of buying securities based on advance non-public information. ETFs may end up being included in an equities ticker.
Exchanges were previously free to set their own prices on their data. Van de Werve argued that “the equities/ETF consolidated tape should be provided on a reasonable commercial basis, as already foreseen in MiFID/R.” MiFiD/R is a way of representing the MiFID directive and MiFIR regulation.
A reasonable commercial basis, Van de Werve argued, “will ensure wide take-up of the tape in the user community.” This basis is commonly used in exchanges, according to Fese, which rejected the innuendo that this wasn’t the case.
Van de Werve also directly took on the interests of the very exchanges who have announced their collaboration to provide a consolidated tape. “The consolidated tape should meet the needs of market participants, and in no way be used to render European exchanges’ own proprietary feeds more attractive,” he said.