A commercially-led solution to a post-trade consolidated tape of record across Europe appears to be making some ground, despite some of the industry’s major players yet to fully back the proposals outlined by the Coba Project.
Despite a general market consensus for its introduction, there have been many failed attempts in Europe to establish a consolidated tape—which have generally been batted away in the past by incumbent national exchanges who are loathe to lose the revenues on offer for use of their market data—but the issue is very much on the table once again in Brussels.
The latest MiFID II proposals, which promise sweeping reforms to the region’s financial services landscape, include the creation of a consolidated tape—either by an industry-led solution, the setting up of a single commercial entity to operate the tape or the establishment of an at-cost utility to run it—so that market participants can have an easily accessible and transparent view of the market to understand whether or not best execution requirements have been met.
MiFID II, though, is not likely to implemented until 2015 at the earliest as delays continue to hold up the process in Brussels and it is also not entirely certain as to whether plans for a consolidated tape will actually make it into the final MiFID II edit.
Although one industry-led solution, called the Coba Project, which was introduced to the markets with much fanfare in November, says it is making some headway despite battling through some industry reluctance.
Mark Schaedel, co-founder, Coba Project
It is the brainchild of industry veterans Mark Schaedel, the ex-market data chief at exchange operator NYSE Euronext, and Graham Dick, the former head of business development at equity trading venue Chi-X Europe,
The buy side, for one, have yet to fully back the project despite the overwhelming majority having wanted a consolidated tape in place for years.
“The buy side are a very amorphous group with very different types of needs,” said Schaedel.
“The problem with the buy side is how do you establish a common view of all those different users on the buy side? We’ve been unable to engage them as a group. But bilaterally we have great support and they all say it is really important to them but organizing them is very difficult. We have had trouble with getting their voice down to a few key guidance points.
“There is a lot of frustration in that group as there have been a few attempts at this before and I’m not sure if they believe that this one is going to prove a result. Therefore, there is some reluctance on their behalf to spend a bit of time and effort on it.
“We have to convince them. Although I think they have to really see it on their screen to really understand what will be different in this new environment. The problem is we are still talking to them with pictures and examples of things that are fairly abstract for their needs.”
However, Schaedel says that he now has exchanges “who represent about 50% of market turnover” in Europe on board as he believes that a commercial-led approach is probably the least-worst option for exchanges to stomach.
“I used to wear their hat,” said Schaedel. “We’ve come up with something that is better than any other outcome that they will see. We’ve convinced a few of the market data vendors for the same reason.”
This something that Coba is proposing is an innovative approach that creates a competing consolidated regime.
Firstly, Coba wants a new standard for how trades are identified across various markets, including the OTC sphere.
“It is not that data is not consolidated today,” said Schaedel. “It’s just that data is not useful when it is consolidated because it yields no information.”
Each trading venue would then agree to conform to this universal trade type specification to provide consistency, with data standards applied to the securities selected for consolidation and there would be specific guidance as to how that data is consolidated to ensure that there is consistency across multiple providers.
A single fixed cost per user—which would be lower than what the various exchanges pass through to users today—would then be charged and a pool would be set up so that the consolidated tape revenues could be distributed to the exchanges based on the bearing each trade has on price formation, in a way similar to the U.S. environment, with the incumbent national exchanges likely to receive the most.
It is estimated that a full set of equity market data costs eight times as much to acquire in Europe as it does in the U.S., which has had a consolidated tape in place since 1975.
“What we’ve tried to do here is adopt many of the U.S. principles of the consolidated tape,” said Schaedel. “Many work well but some don’t. It was invented in the U.S. at a very different time. It has done a lot of great things but it should evolve. The nature of the model doesn’t allow it to. It has been hard coded into the national market system there.”
Schaedel believes that the Coba model for Europe could be in place at least a couple of years before anything that emanates from Brussels.
“The MiFID review was started off because of transparency concerns in the markets,” he said. “But other issues have since been created that have took priority over the consolidated tape.
“But that is largely because the business of market data and data quality issues are fairly esoteric. It is not something that a politician wants to spend a lot of time on.”
Schaedel, though, believes that the Coba Project will eventually take off.
“Once we have agreement from a few big market participants then others will follow,” he said. “The idea is we will create momentum through a grass roots campaign.”
Fellow co-founder Dick added: “We have established a framework which addresses all of the regulatory, technical and commercial issues and has sufficient industry support to move forward.”
