By Kelvin To, Founder and President, Data Boiler Technologies
After a month in Europe meeting with regulators, trading venues, market participants and other stakeholders, I have many takeaways pertaining to the Consolidated Tape (CT) and related market structure reforms. Analogies from my mix of train rides and air flights traveling across 14 countries and 18 cities, how the CT can provide seamless experience that fit different purposes? I invite you to join me on this journey by clicking here to download the full whitepaper.
The following is an abstract summary:
• Tight spread constant refreshing EBBO as advertised price to draw big crowds and infuse trust
• Deciphering the Consolidated Tape in layperson terms, its economic viabilities and market impacts
• Dynamics among the protectionists, opportunists, regulators, overlooked, and the underrepresented
• Save costs, grow the overall pie, reduce vulnerabilities, and support sustainable economic development
Amid the creation of a Savings and Investments Union initiative upon the incomplete Capital Markets Union, the EU needs substantially more than a name change. It needs to convince the world to place their trust and money in the EU market. Given Brexit and the UK taking divergence paths with the EU, international competitiveness and growth is at the heart of the UK FCA. In the race of market data reform, the US is leading the world with the Securities Information Processors (SIPs) introduced back in 1975 and the most recently approved rule (effective December 9, 2024) to improve Transparency of Better Priced Orders, a.k.a. accelerated implementation of Market Data Infrastructure Rule.
Travel across Europe with a low budget takes careful planning and understanding of the nuances (market micro-structure). The same goes with building the CT, to make the impossible possible, e.g., making a CT subscription of €100 per user achievable. Every country I visited has these Americanized boardwalks that connect to my favorite old towns. They co-exist and grow the overall pie, which is the key point here.
I am not sure if it was the European pride or protectionism, rejecting the Americans in building the capital markets’ boardwalks (see this for our suggested mock-up “Schematic of EU Equity Data Aggregation and Consolidation”) to attract big crowds. On one hand, the issuers want these American big brands to invest in their companies. On the other hand, local Exchanges and small domestic participants are worried that order flow may be segmented away to erode their market shares. Selling data and connectivity is the bread-and-butter for typical Exchanges. Yet, such is the mentality of ‘we burn, you burn with us’ to [allegedly give CT crappy data, e.g., 100,000 messages at any given point in time, i.e., mussed up everything and ecosystem degradation to exacerbate gap between proprietary feeds and CT] is sadly a lose-lose approach.
Protectionism and self-interest blinded the eyes of the bigger picture. I am referring to the EBBO. This empirical study shows that “traders are more likely to select dealers (SIs) over exchanges when quoted bid–ask spreads are wide on exchanges and when the tick size is not binding in the exchanges order books.” For a win-win approach to enable prosperity for all EU Citizens, Europe needs a narrow bid-ask spread and constant refreshing of the EBBO, i.e., not over 100 messages at any given point in time to make the tape useful / suitable for BestEx analysis.
It is totally practical as proven by the High Frequency Trading firms (HFTs) and self-aggregators (SAs). Exchanges are not doing anything extra but providing the same fastest data feed and connection as they provide to the HFTs and SAs (see MDIR ‘same manner same methods’ provision). It benefits the trading and investing communities, including the European trading venues because a usable tape and narrow spread EBBO advertised price can draw crowds to shop in the European markets.
There are legitimate reasons why pre-trade data in Consolidated Quote System of the US SIP is prioritizing speed over streaming of non-core non-essential data. It goes fast by traveling light, analogies to my having 1 backpack and 1 carry-on for my entire 1-month trip. Time lock encryption (TLE) and compressed streaming of “core data” and relevant regulatory data can help overcome the extra hop latency issue in data consolidation. Because it takes a longer time to decode the full depth of book, odd-lot and other nitty-gritty in the Proprietary Feed. The CT would NOT be at a disadvantage in net.
One does not need to know how many people are in the queues of every convenience store across all European markets if he/she may be shopping for milk within neighborhood distance. Top-of-book EBBO provides an indication and introduces price pressure that any neighborhood store should not be too far off from this pan-Europe best price. Again, using a mix of CT and selected Proprietary feeds save money.
I wonder why some local European firms may decide to choose an endogenous selection to trade on certain exchanges or with dealers, and then review the performance every 6 months instead of up their game in execution performance. One logical reason is they under invest in technologies and lack resources or are understaffed. Second, a lack of EBBO thus far causes their clients not to be aware of receiving inferior price. Third, they rely on a strong presence throughout Europe and stickiness relationships with clients rather than execution performance to do business. Fourth, they are afraid that the geographic dispersion and aggregation distance would cause their EBBO refresh rate to be ‘stale’ anyway, that I disagree.
The market shrinks because of protectionist policies that reduce serendipity. The viability of a CTP business model is dependent on its ability to fulfill different sell- and buyside subscribers’ needs. CTP central procurement should be able to save money also for SAs. CT must have non-display low latency subscribers to commingle with display options for outgoing data delivery. One size does not fit all. Attempts to use a single “cloud” service to satisfy both is naïve.
If a pre-trade equity CT is not using the same low latency methods and manner of delivery that Exchanges provide to the HFTs and SAs for incoming data to CTP, it essentially creates more data fragmentation (i.e., what you see on CT is not the same as what others see on Proprietary feeds). The US SEC recognizes the SIPs were not modernized alongside markets evolution and technologies development, therefore it requires the “same manner same methods” provision (see page 186 or footnotes 608 and 609 of MDIR).
I recommend forming an industrywide non-profit entity (NPE) and putting our technologies on top to bid for the CT. Broad representations in governance of the NPE (like NASD before it becomes FINRA) are substantially superior to rate setting by any one group.
