How could Brexit impact the consolidated tape in Europe?

Published on 19 May 2021

Developing a consolidated tape of post-trade prices will be at the core of the European Commission’s (EC) review of the MiFID II rules which came into effect in 2018. Since the departure of the United Kingdom (UK) from the European Union (EU), the UK’s market regulator has consulted on the development of a tape for its markets.

If European firms are to manage two tapes – one for the UK and and one for the EU – the effects of consolidation, such as lower data costs and standardised data formats, could be signfnicantly reduced.

We asked Christoph Hock, head of multi-asset trading at Union Investments, Jason Waight head of regulatory affairs for Europe at MarketAxess and Stephane Malrait, global head of market structure and innovation for financial markets at ING Bank, how the developments might pan out and what effect that could have upon buy-side and sell-side traders.

Dan Barnes: Welcome to Trader TV – your insights into trading for professional investors. I’m Dan Barnes. This year we’re expecting to see the European Commission publish its plans for the consolidated tape for fixed income trading, and the UK potentially to publish its plans for a separate tape. Joining me today are Christoph Hock, head of Multi-Asset Trading at Union Investments, Stephane Malrait, global head of market structure and innovation for financial markets of ING Bank, and Jason Waight, head of Regulatory Affairs at MarketAxess. We’re going to be discussing the potential impact of multiple consolidated tapes on the fixed income landscape within Europe.

Speaker 2: Cristoph, Stephane, Jason, welcome to the show.

Christoph Hock: Thank you, Dan.

Stephane Malrait: Thank you.

Jason Waight: Hi Dan, happy to be here.

Dan Barnes: So to start with, what is the gap that a consolidated tape could fill in fixed income markets today?

Christoph Hock: Higher transparency will lead to better performance when it comes to execution of transactions, and some asset management firms, they are already at fairly high levels, bringing us potentially from 90% to 95%. Others, smaller ones, who probably can’t afford collecting all the data these days, for them, it will be a big advantage. Clearly, the tape from the buy-side industry point of view will be extremely helpful. I think it’s important to finally get it done, because we have been discussing this with the commission, with ESMA for years and years, this topic of a consolidated tape, having had most recently a discussion with Tilman Lueder from the EU Commission. I think we are somewhere at kilometer 40 of a marathon, so pretty close to the goal!

Stephane Malrait: One, we hope is going to be a difference in costs, so we hope it would be much cheaper to aggregate data from different places. Two, the data currently available, which is not from APA or Trading Venue, so there is quite a long delay on that as well. So it’s not real time data. And three, it suggests the connectivity as well as the price of getting aggregating the data with different formats and try to put them together.

Dan Barnes: Which are the directions that the European Commission’s consolidated tape could potentially take?

Jason Waight: There’s a few key decisions that are waiting to see the outcome of, I think probably the biggest one is whether the commission would go for an industry-based solution or more of a self-regulatory organization as we see in trades in the US. I think we’re fairly relaxed which way that goes, although we’ve made the point several times that the current framework simply prohibits the development of a commercial solution, and particularly in corporate bond markets, the rule that they should be made available for free after 15 minutes, which potentially works very well in other markets, but in corporate bond markets, 15 minutes is probably still the last trade.

Stephane Malrait: It’s a problem of what governance this new tape will have; is it a public partnership with the private sector or is it fully private? How will this governance work to know which bonds are going to be on the tape in real time vs the other bonds? If it’s a way to have a new set of expensive data to buy, it’s not going to work for a lot of actors. It has to be in a way that a commercial proposal can be accessed by the maximum population in Europe.

Christoph Hock: The interesting bit, obviously, is to get the less liquid stuff into a consolidated tape and that’s where the value add for the buy-side industry is coming from. We have to find the balance between, on the one hand, protection of risk books, of balance sheet, the sell-side is providing to us as buy-side, so the highest level of transparency would lead to a point where liquidity provision from sell-side is not given any more in the way we have it today.

Dan Barnes: If there was a development of a dual tape, one in the UK and one in the European Union, what effect could that have on trading performance?

Christoph Hock: I could live with a situation where we have two consolidated tapes. So we already consume US data via TRACE, and we have in Europe multiple APAs, so a kind of US consolidated tape, plus one for the UK, plus one for continental Europe; that’s a situation we can easily cope with. What would clearly have disadvantages is having, within Europe, a highly fragmented world and not a concentration on UK on the one hand, in continental Europe on the other hand.

Stephane Malrait: I think it’s going to be very interesting in the next 12 months to 24 months, because the first step between the UK and Europe, I believe, will have a big advantage, because people will start to see the liquidity happening in that region in real time. The second advantage is a technology provider behind that tape could also apply to be the tape on the other side, right? So we prove that we have a good commercial model and good technology. So why don’t we apply it to the other one as well? And if this happened, then for me it’s better because even if it’s two legal entities, my technology connection will still be one. And this is what we see today with the MTF. In the MTF, you have an MTF in Europe, an MTF in the UK, but the technology connectivity is very simple.

Jason Waight: The best outcome we can hope for is a sort of single technology provider that’s able to operate in the way that MTFs to do today, which is to have essentially one core cost of providing the service, one technical feat, but two regulated tapes potentially operating under slightly different transparency rules. And I think that’s probably what we will see emerge. I don’t think either market can afford the other one to have a tape and not them, particularly when you look at the scale of some of the cost savings the TRACE has generated, according to the academic research.

Dan Barnes: What should heads of trading do today in order to manage the process going forward?

Stephane Malrait: I think they should watch your show, because they need to be aware of what’s going to happen and prepare for it. So, I think the education level needs to be there to understand what is going to change, how it’s going to change, because technology changes take time. We have to plan in advance.

Jason Waight: There are real time data products available today and engaging with those in preparation for the full version of transparency that we’re likely to see over the next 12 to 18 months, whatever time period might be, may also be quite helpful.

Christoph Hock: It would be naive just waiting for a consolidated tape, leaning back, doing nothing. For the last couple of years, we’ve developed two sophisticated tools which already enables us at a very high level to aggregate data to make use of this data for smart brokers selection, to have a really good judgment on the liquidity situation, and consolidated tape will be an additional source going forward in the evolutionary process of making smart use of data.

Dan Barnes: That’s great. Christoph, Stephane, Jason, thank you so much for your time today.

Christoph Hock: Thank you.

Stephane Malrait: Thank you very much.

Jason Waight: Thank you.

Dan Barnes: I’d like to thank Christophe, Stephane and Jason for their thoughts, and of course you for watching. To catch up on our other episodes, go to TRADERTV.NET.