The Financial Conduct Authority (FCA) has proposed the introduction of a UK consolidated tape (CT) for bonds and equities.
A CT is a high-speed electronic system that combines multiple sources of trading data into one stream of information.
The FCA has said that a CT, specifically designed for the UK market, will increase industry competitiveness and enhance the quality of trading data.
Sarah Pritchard, executive director of markets and executive director of international at the FCA, comments: “We are adapting our rules to make sure the UK market works well, providing certainty for firms and so providing a good environment for investment. The new CT will help reduce trading costs, increase transparency and improve data quality.”
Commenting on the decision, the Association for Financial Markets in Europe (AFME) has said: “[Introducing a CT] is a welcome step as it will help to ensure that associated data costs remain as low as possible. [It will also] address the current fragmentation of post-trade transparency data.”
It adds: “We recognise that even an appropriately constructed CT will not fully address the current unacceptably high cost of market data. We trust that the FCA’s extensive work on wholesale data will help address anomalies in this area, which are detrimental to financial markets and their users.”
AFME has said it would like to see a single independent consolidator for each asset class, as well as fair and appropriate price levels for professional and non-professional users respectively to ensure that it is commercially successful.
In addition, the association has requested that the CT is sold with a simple, single market data licensing framework, covering a variety of use cases. It also requests that data quality is addressed alongside the development of the CT with industry stakeholders’ involvement.
The association further requested that mandatory contribution from all venues to the tape be paramount and that there is no mandatory consumption of the CT.
In relation to the proposed CT for bonds, AFME said the post-trade CT should ensure that committed liquidity providers are not exposed to undue risk, especially when trading in illiquid instruments or transactions above a certain size, given that there are relatively long timeframes to unwind or hedge the trade in such instances.”
In its statement, AFME also said: “Open and constructive engagement with industry stakeholders is an important process for the development of high-quality regulation, which in turn promotes strong and healthy financial markets and, ultimately, growth.
“AFME advocates for evidence-based policy making and we are supportive of the rigorous approach that the FCA has adopted in relation to the cost benefit analysis supporting its policy positions. AFME looks forward to engaging with the FCA on this fundamental issue.”
To improve levels of pre and post-trade data, an equities CT should be continuous and operate in real time, adds AFME. This would ensure users are given a complete picture of the market while remaining commercially viable.
Jim Goldie, head of EMEA exchange-traded funds (ETFs) capital markets at Invesco, has commented on the FCA’s proposals for a UK CT. He indicates there should also be a UK CT that includes ETFs alongside equities.
“Similar to the EU’s CT, it will be incredibly important to see ETFs included alongside equities in the UK version,” he says. “This will help to document best execution, enhance market surveillance and improve liquidity risk management and portfolio valuation, all of which adds to investor protection.
“However, the devil will be in the details. It is important that the UK CT is as near real-time as possible and includes ETFs alongside equities in one tape, similar to the EU CT. It is also important that it includes venue attribution, unlike the EU CT.”
Galina Dimitrova, director of investment and capital markets at the Investment Association (IA), says: "An appropriately constructed and fairly licensed CT will be an important cornerstone in reforming and tailoring UK capital markets.
“A CT for bonds followed by a CT for equities and ETFs will help ensure a golden source of market data on prices and volumes traded for these instruments and will enable all market participants, including retail investors, to access robust data in a timely fashion enabling IA members to best serve the needs of their clients.
She adds: “We very much support the FCA’s intentions to run a competitive tender process to appoint a CT provider for bonds as this will likely aid competition and drive innovation. However, we caution that any fee structure associated with accessing the CT must be palatable and fair for all market stakeholders.”
Commenting on the FCA’s plans to develop a CT for fixed income, David Everson, head of trading, fixed income EMEA at Liquidnet, says: “It makes sense that the UK would prioritise a fixed income CT first as the asset class has traditionally been much more opaque than, for example, equities. It will be interesting to see how this progresses.
“The objective of having a regulatory framework in place by 2024 may be a little optimistic. These things tend to take much longer than expected to execute. The market will undoubtedly welcome the additional transparency that a consolidated tape may bring, particularly if it helps to drive down the cost to trade which, it could be argued, is increasing.
“However, a fixed income CT will unlikely solve all the pain points overnight. The US has had TRACE for some time, yet suffers from similar obstacles around price transparency.
He concludes: “The prospect of both an EU and a UK consolidated tape will be extremely interesting to data hungry systematic or algo type houses. Real-time trade prints and better pre and post trade data will also very likely accelerate further the electronification of fixed income markets.”
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