The UK’s Financial Conduct Authority (FCA) has outlined the next steps in the development of an equities consolidated tape (CT) in a consultation paper of 20 December 2023, with a particular focus on the ramifications of including pre-trade data.
In the FCA’s consultation paper of July 2023 it set out some of the main design issues relating to an equities CT and sought feedback. The regulator said it will update on next steps for an equities CT in 2024 with December’s consultation set to close on 9 February.
The FCA said its first step will be an analysis of the potential impact of the inclusion of pre-trade data in an equities CT on liquidity in central limit order books (CLOBs) and the quality of execution received by different types of investors.
BMLL CEO Paul Humphrey told BEST EXECUTION: “As a leading specialist provider of historical data, BMLL is pleased the FCA has recognised both the importance of historical data, and the different skills required in providing historical data. Once the market has determined what a post-trade equities tape might entail, BMLL has the data quality to support participants’ needs.”
The FCA is also working on a CT for the bond market, which is further along than its work on the equities CT. The regulator said it expects that a bond CTP will start operation in the second half of 2025. Both approaches are making changes to the existing framework of rules relevant to consolidated tape providers (CTPs), with the equities CT being developed over a longer timeline than the bonds CT.
The European Securities and Markets Authority (ESMA) has confirmed consolidated tape providers (CTPs) will be selected by the end of next year, pushing the launch of the CTPs to 2025. The selection process for an equity CTP will begin in Q2 2025, with a decision made on this CTP provider by Q4 2025.
“We continue to regard the market for bond data as distinct from that for equities and
take the view that the two need distinct assessments of the potential role of a CTP, its
characteristics and its benefits in the relevant trade data market,” the FCA said.
Market Structure Partners CEO Niki Beattie told BEST EXECUTION that the FCA is being careful by not saying that any of these changes will firmly apply to equities, and is reserving the right to consider more fully what an equity consolidated tape should look like.
“However, the broadly proposed framework such as a single CTP, a CTP offering no value-added services in the same entity, for example, are very relevant for equities. Issues such as revenue sharing are more contentious in equities and so there should be different parameters,” Beattie said.
Most respondents to the FCA’s consultation paper agreed that shares, depositary receipts, ETFs, certificates and other similar instruments should be included in an equities CT. Respondents also generally agreed that the equities CT should include ETCs and ETNs.
Beattie said that the more data that the CT can collect, the better for the market, though it is important to recognise that ETCs and ECNs don’t share all the same characteristics as equities in terms of the transparency regime.
Most respondents strongly supported the inclusion of pre-trade data in an equities CT. Several – including the main buy- and sell-side trade associations – suggested the inclusion of at least five levels of order book data with venue attribution. However, other respondents opposed the idea, suggesting it could undermine the role of CLOBs in concentrating liquidity to the detriment of market quality and the overall resilience and stability of equity markets. It was also argued that pre-trade equities data could disadvantage certain market users by encouraging trading decisions based on stale prices and creating opportunities for latency arbitrage.
Beattie said that while the FCA maintains the debate on this is polarised, the main opponents to the inclusion of pre-trade data are the incumbent exchanges who fear this will impact their data revenues and allow competitor CLOBs to win flow.
“The exchanges are being disingenuous in their argument that this undermines CLOBs. In our extensive research we found that lit markets would significantly benefit from pre-trade order data being available on a CT as it would really highlight where the best liquidity is.”
“At the moment more flow than there should be is being directed to dark markets because investors can’t see all the lit market liquidity. Good pre-trade data will really enhance competition and keep the incumbent exchanges on their toes as new competitors can emerge more easily,” Beattie said.
There should also be five levels of data to counter any latency issues. “If you can see five levels of data then the fact that the single top level is changing faster than the eye can see is less relevant because you have a greater view of the direction of the market in the next levels down. It should also include the named venue information ascribed to the best prices being shown so that people can immediately see where the best liquidity is,” Beattie added.
The FCA said that given the importance of the attractiveness of equity markets in the UK for the wider competitiveness of UK wholesale markets it is important that the regulator has “a very firm evidence base” before making a judgement on whether or what pre-trade data should be included in an equities CT.
“Our further work on an equities CT will give priority to conducting analysis of the possible impact of the inclusion of pre-trade data on the stability and resilience of UK equity markets and the outcomes for different types of users of the market.”
© Markets Media Europe 2023
