By Kelvin To, Founder and President, Data Boiler Technologies
Market data reforms are taking many interesting turns globally. In the US, litigation between large exchange groups and the SEC continues. IEX plans to charge for market data starting in 2022. MEMX criticizes the CTA/CQ/UTP Plan’s fee amendments and cites that “it would undermine the important public policy goals of the infrastructure rule”. Then in Europe, the European Commission announced on November 25 as part of the Capital Markets Union (CMU) to amend the consolidated tape provision in MiFIR.
Era of Reckoning
Although the SEC has put in place a strict timeline to implement the market data infrastructure rule and the CT Plan, different camps wasted no time to ensure their self-interests would be maximized amid changes in market structure. The market expected litigation fights between the SEC and the large exchange groups over this market data reform. We at Data Boiler, and others, had told the SEC that the exchanges would raise prices and/or cut incentives to preserve their lucrative stakes. The SEC has essentially “outsourced” the decision making authority to the operating committee of the CT Plan, and creating an unbalance phenomenon (i.e. large exchange groups dominating the vote while smaller exchanges and non-exchange representative are a minority).
This unsettling situation will continue as this is a warring states period. Finding a new equilibrium will take tremendous negotiations among all the different stakeholders. When market participants recognize the fact that some are more equal than others in terms of fees, rebates, and what not, they will fight fiercely and will most likely consolidate to strengthen their respective echo chambers. In turn, the US market will become polarized until the long-standing question of “who owns the data” is resolved at a new equilibrium.
Meanwhile, the EU is reckoning that they do not want to be a follower of the US’s competing consolidator approach. The CMU MiFID amendments will facilitate the emergence of one Consolidated Tape Provider (CTP) for each asset class (shares, ETFs, bonds and derivatives). The EU’s emphasis on real-time and clock synchronization is definitely applaudable. The EU’s CTP is expected to come up with a revenue sharing model with the Exchanges. Hence their interests may be aligned rather than competitive. This creates a very interesting cross continents’ dynamic that I’ll explain next.
In the US, the SEC dismissed the concern of multiple NBBOs. In the EU, the SIX-Group offers a Swiss EBBO. We will have to wait and see if this Swiss EBBO becomes the de-facto EBBO for EU consolidated tape. No EU member would want to be disadvantaged amid the aggregation distance or location differential issues. We, at Data Boiler, continue to advocate for the use of time-lock encryption to ensure market data is available securely in synchronized time. That being said, Brexit may prompt UK (LSEG – Refinitiv) to consider a separate consolidated tape, rather than agreeing to a pan-Europe synchronization scheme.
Our point is: if Europe as a whole can come up with a single EBBO, it serves as the de-facto reference price where investors around the world can anchor and rely on. Europe is strategically located between America and Asia. Each day, when order flow gradually shifts from the West to the East, this anchored price would make it attractive to trade in Europe, rather than the US. Although the US has many advantages in trading equity, we foresee a significant part of bond and FX markets shifting elsewhere.
The potential for EU to become the number one global bond center is huge. This could go beyond catching-up with the US FINRA TRACE system. Indeed, EU may learn from TRACE recalibration to formulate its own strategy to suit both Europe and Asia bond issuers and investors appetites. In the fixed income space there is
so much innovation that firms like: MarketAxess, Tradeweb, Trumid, etc. are working on. They may help enhance liquidity of the US market and/or they may go east to help China solve their debt crisis. We think the EU can attract the best talents, helping Europe bridging the gaps between America and Asia (including Japan and Australia).
For the UK, we think the market data leaders (LSEG-Refinitiv-Russell in particular) will need a defined strategy on who they want to ally with in doing business. For example, originally FTSE Russell rejected the Chinese government bonds to its flagship World Government Bond Index, but changed their decision in 2020. Also, it is noted that FTSE removed more China stocks from indexes over U.S. ban, while other news indicates that FTSE Russell is considering major changes to the index under-pinning a widely used China futures contract in Singapore. If the EU and the UK slack behind in innovation, we think the Singapore Exchange would be happy to become the go-to market in bridging the East and the West.
Nowhere, Anywhere, or Everywhere
Certainly there’s a lot going on in the market. The US does want to compete The US must find a new equilibrium with things like payment for order flow (PFOF) and other market structure issues. Otherwise the US market will remain largely status quo and go nowhere because the serendipity will be reduced by polarized echo chambers.
For Europe, their determination to ban PFOF under the new MiFID amendments help policy makers to focus on what will drive growth to the overall pie. Hence, having the big picture of where things may appropriately fit and aligning the rights and obligations should be their number one priority. They can find data aggregators or competing consolidators anywhere, but objective insights into nuances and the know-how of weaving the fragmented markets across asset-classes together boils down to only a handful of talents globally, for which we agrees with EFAMA’s criticism of the Oliver Wyman study.
There are interesting dynamics on a geo-political level, as well as on a market structure micro-level. In our opinion, everybody is a trading venue, nobody is a trading venue; everybody is a market-maker, nobody is a market-maker that stands ready to buy or sell a stock at publicly quoted prices in both good and bad times. The pandemic has pushed the world to a big decoupling already, let’s engage through innovative means. Who knows, the future may be a full embrace of the cloud with multicast if anyone can pull-off this trick and figure out the economics to benefit everyone.
Other remarks and conclusions
We are thankful for policy makers around the world recognizing the importance of market data reform, despite the US and the EU taking divergent paths. Per our recommendation to IOSCO (Appendix 1 in particular), carefully assess the economy of scale, economy of scope, and the 4Vs for different constituents to curb conflicts. There are pros and cons to each strategic move. So choose wisely and build consensus to grow the overall pie. Last but not least, be skeptical with the Big-Tech whom might be willing to build a consolidated tape on the cloud for minimal amount or even for FREE, because we do want to preserve the confidentiality and privacy of everyone’s trading strategies.