Creation of a Single Market View in Europe4th August 2014
A perennial debate in the European equity space is the lack of a single view of an equity across the continent. A consolidated tape has been available in the US market for years and has led to easier, more transparent price discovery.
A consolidated European tape would allow professional and private market participants alike to find the latest price of, for example, HSBC trading in its many guises on Euronext, Frankfurt, XETRA and London from a single feed.
Currently this picture is fragmented and obtaining it is expensive. In order to get a full view of an instrument trading on multiple markets participants must subscribe to each exchange. This means paying hefty fees and consolidating this information themselves into a single view, for the particular equity, to determine its current fair price across Europe.
The advantages of a composite view for the full range of market data consumers would be numerous including the ability to subscribe to a single service instead of multiple exchanges for trade reports and quotes, better transparency of pricing, lower administration costs associated with dealing with a single distributor as opposed to multiple exchanges, and the provision of a single pan-European pricing model for basic equity market trade data. While this vacuum continues financial market products have had to find innovative ways of providing a single view of a company themselves.
For instance, the TIM Investor product does this by grouping instruments for a single company and presenting one set of values for the organisation, removing the complexity for customers. This provides users a single view of key ratio and pricing information alongside TIM’s proprietary indicator value for the full range of instruments traded in the company.
However, an industry standard is needed for intraday price data and this is where the vendors and exchanges must devise a viable solution. Attempts to solve this have been made in the past but no vendor or participant has provided a full end-to-end product that has been seen as attractive to the market. There are many challenges that need to be resolved in order to successfully implement a universally accepted solution:
- Flagging trades consistently is extremely difficult in Europe and regardless of being able to identify a trade correctly (as broadly off or on book) European exchanges have different rules about what trades count towards accumulated volume and the high, low and close of each trading day, for instance. This inconsistency needs to be overcome if a consolidated market view with summary facts is to be provided. Market Model Typology (MMT) aims to solve this problem but its standards must be adopted across the region to ensure success.
- One of the bigger challenges facing a European consolidated tape is how to account for currency. Should the tape attempt to ‘normalise’ on a single currency or simply report a trade in the currency a trade was executed in? The ideal solution would be to provide both: a standardised reporting currency with an agreed exchange rate fixing and alongside this, the actual price in the execution currency, where different. Users of the consolidated feed can then decide which is most appropriate to their business.
- Latency is another major factor. Any consolidating body that creates a tape in Europe will have to aggregate trades from multiple exchanges and then re-disseminate the trades themselves to ensure the correct temporal order of the trades which will inevitably lead to latency. To overcome this an agreement that all trades are reported through a single consolidated system and re-distributed from there is required.
- Costs need to be controlled both from a consumption and a re-distribution perspective. It is prohibitively expensive for most consumers and distributors to pay the aggregate constituent exchange fees of each venue as the data consumption prices (currently independently set) dictate. A ‘reasonable cost’ basis needs to therefore be established. The challenge with this is that by implication exchanges’ profit margins on their trade data will be lowered to make this an attractive consumer proposition. The only way to mitigate this concern would be to prove that greater trade volumes will occur across markets as a result of more price transparency – which can certainly be argued – or to legislate a lower cost for data – so that it is provided at a reasonable discount to the constituent parts. Each exchange will then receive a proportion of this single fee paid by subscribers.
- To make the tape attractive it must cover every equity in the European markets. If it does not consumers will have to subscribe to both the consolidated tape and individual markets when instruments of interest are not covered on the consolidated tape. This would be prohibitively expensive.
All investors need this level of transparency to ensure an efficient market that will ultimately allow them to achieve greater, fairer returns on equity investments. Without a consolidated tape, at a reasonable cost, fair valuation and full price transparency will remain elusive to the detriment of solution providers, financial intermediaries and ultimately the investing public.
Vendors need to collaborate with exchanges to devise a solution that meets the above challenges and bring it to the market. If vendors and sources of pricing information cannot meet this challenge, it seems highly likely that regulation will be required in the not too distant future which will be to the detriment of both.