The London Stock Exchange Group has finally come out with a stance on the consolidated tape, an issue on which it has hitherto remained cautious. A new statement released today by head of market structure Jessica Morrison urges an “accurate post-trade tape” but says that “a robust use case” for including pre-trade data is lacking. Â
The growth of the UK capital markets should be a priority, says Morrison, noting that “market data improvements should be prioritised against the backdrop of the broader regulatory agenda” and that consideration must be given to the UK’s unique market structure compared to the US and Europe, including its retail market and the “outsized proportion” of SI volumes, driven in part by the distortions caused by the UK stamp tax regime.
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An accurate UK post-trade tape, says Morrison, would enable the buy-side to place larger orders and the sell-side to include the additional available liquidity in volume profiles, moving away from the current venue-only calculations. LSEG also recommends that the UK’s Financial Conduct Authority (FCA) initiate a review of post-trade reporting accuracy, as “transparency of volumes is essential for the market”.
No need for pre-trade
The report goes on to make an argument against the (initial) inclusion of pre-trade data into any UK equities tape. “Feedback from the market is that having agreed volume numbers both in terms of addressable and total liquidity would be most effective in improving secondary market trading liquidity,” explains Morrison. “We would not want the FCA to delay the roll out of a post-trade tape while there is a necessary debate around the value of and risks associated with a pre-trade tape.”
LSEG believes that the quantity and quality of secondary market liquidity is central to retaining listings and stemming the tide of liquidity out of the UK. “The ability to inform current issuers about total activity in their company and prospective issuers about total liquidity in their peer companies…Â is integral to the attractiveness of London as a destination for IPOs and secondary trading,” urges the report.
READ MORE: FCA mulls inclusion of pre-trade data in equities consolidated tape plans
Best execution concerns
In addition, claims Morrison, “a robust case for a real time pre-trade tape is lacking”. Although pre-trade data has benefits when it comes to TCA and historical order placement analysis, LSEG does not believe that this information is used often enough, on a trade-by-trade basis, to make it worth including. Instead, it recommends, users should utilise vendors who already provide this data on an aggregated post-trade basis.
With UK lit continuous volumes at all-time lows, LSEG also believes that further quantitative metrics need to be analysed to consider the impact on price formation. “If price formation breaks down, it is to the detriment of all mechanisms that use lit order book liquidity as a reference price,” stresses the report.
LSEG warns that when it comes to pre-trade data, latency should be a key concern that could negatively influence quality of execution. “Using a delayed market data feed for trading would result in uncertainty in execution outcome and so complicates the ability to demonstrate best execution,” it says.
Keep it simple: stick to post-trade
LSEG’s position is that an accurate post-trade tape could provide the price, volume and venue information needed for a trader to get a more complete view of the market given the inclusion of trades executed away from central limit orderbooks (CLOBs).
“Members of the London Stock Exchange have indicated that they will continue to trade on
direct feeds as they value precision of execution. Others using pre-trade market data for automated trading should consider the value of a pre-trade CT given the impact on execution quality and certainty,” stressed the report. “If the sell-side stay on direct feeds but the buy-side move to stale consolidated feeds for automated order placement, we believe this may lead to a mismatch in expected execution outcomes.”
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Cost v quality
Finally, Morrison warns achieving a robust tape will require robust investment – and a pre-trade tape could be prohibitively expensive, as well as overtly risky.
“Producing a low latency, operationally resilient pre-trade feed simply cannot be achieved on a low-cost basis without compromising quality. Whilst we agree that there is a need for better market transparency, we do not see how a pre-trade CT can act as a tradable back-up in case of a lit market outage and not be subject to the same operational risk measures as venues.”
Market opposition
The statement, and its strong position against the inclusion of pre-trade data, is in direct contrast to the position of some other stakeholders – notably Cboe, whose president of North American and European equities, Natan Tiefenbrun, has been vocal in his support for pre-trade information.
“The paper makes some valid points on market transparency and the importance of getting the post trade tape right,” Tiefenbrun told Global Trading. “But the benefits of a pre-trade tape are widely understood and supported by the majority of data users, so it is disappointing that this doesn’t have the LSE’s support and that they use arguments to support their position that have been widely debunked. We’ll continue to advocate for a real-time pre- and post-trade CT in the UK.”
In 2023 EFAMA also issued a statement urging pre-trade data inclusion, claiming that market participants, including the European buy-and sell-sides, have consistently maintained that a post-trade only equities/ETFs consolidated tape will not meet with the market demand required to make the tape commercially viable.  “This would be a legislative setback that European capital markets can ill afford with competing markets globally offering better trading conditions, and demonstrating the growth to prove it,” said EFAM director general Tanguy van de Werve in a statement.
In May 2023, over 18 asset managers signed a letter endorsing the inclusion of real-time pre-trade data in a European equities/ETF consolidated tape. The year before, AFME, BVI, Cboe Europe and EFAMA released a paper urging the mandatory contribution of pre-trade and post-trade data for a successful European equities CT.
FCA view
When it comes to a UK equities tape, the FCA has already explored the issue in some depth, as outlined in its July 2023 paper on ‘The Framework for a UK Consolidated Tape’. In it, the regulator admitted that: “To the extent that a CT leads to increased fragmentation of trading in equities this might diminish the attractiveness to issuers of those trading venues in the UK offering a primary market. Issuers might have concerns about listing on a venue which cannot itself offer a significant depth of trading.” However, it also outlined several arguments in favour of including pre-trade data: including questions as to whether an exclusively post-trade tape would be commercially viable, and – crucially – that “inclusion of pre-trade data will make markets more resilient by providing a trusted source of pricing that will enable continuity of trading when there is an outage at a venue, particularly the venue of primary listing for shares.”
The FCA concluded that: “We think that there would be demand from market participants for a benchmark of trading volumes in the market from post-trade data. However, a CT that included pre-trade data may better enable it to achieve the desired outcomes underlying this intervention, which may in turn lead to greater uptake of the CT by a wide range of user types.”
LSEG did not immediately reply to Global Trading when contacted for comment.
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