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Is Market Data Reform a Race to the Bottom?

Consolidated tape regulations in Europe and the U.S. are on parallel tracks with similar objectives, but there is no clear path to consistency and convergence.

Friday, October 25, 2024

By Kelvin To

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The United Kingdom and European Union are trying to catch up with the U.S. in building their respective consolidated market tapes, known in the U.S. as the Consolidated Audit Trail (CAT). The U.S. has no intention to slow down and wait for the Europeans.

Yet a 2022 District of Columbia Circuit Court of Appeals ruling weakened the already weak SEC “CT Plan” governance proposition. The decentralized competing model – two-thirds self-regulatory organizations (SROs) and one-third non-SROs representation in the operating committee – could not be executed. Prescribed minimum terms and conditions for CT Plan Version 2 in replacing the non-SRO representation provisions are ineffective. The SEC instituted proceedings in April to determine whether to approve or disapprove it.

Improving the capabilities of the Financial Instruments Transparency System (FITRS) that hosts the results of the MiFID transparency calculations in the U.K. and EU has stirred up much debate. Various stakeholders (ICMA, AMF, ESMA, FCA) are conducting qualitative and quantitative assessments to decide the liquid classes of financial instruments, particularly bonds. The industry is looking at the regulators to be the referees, while the regulators are asking the Data Expert Group (DEG) to propose recommendations.

Liquidity is a highly subjective discussion point. Learning from the US FINRA TRACE recalibration to formulate a strategy to suit the issuers and investors’ appetites would help.

Defining “Real Time”

Given the stages of development and current market structure differences for equity and non-equity markets, the definition of “real time” for equity CT should not be the same for bonds. Doing so could be a detriment to fixed-income market liquidity.

kelvin-toKelvin To of Databoiler Technologies

A proposed U.S. rule to reduce the 15-minute TRACE reporting timeframe to one minute is problematic. The European Securities and Markets Authority, in soliciting public comments, stated that “in light of cost-efficiency considerations, ESMA recognizes the potential benefits of establishing a single set of requirements applicable across the three asset classes. This approach would streamline compliance efforts for data contributors reporting to multiple CTPs [CT providers] across various asset classes, promoting operational efficiency and reducing administrative burdens.”

According to an empirical study, minimum requirements for the technical criteria are barriers to innovation. Potential bidders to become CTPs in the U.K. and EU, or competing consolidators (CCs) in the U.S., would prioritize compliance over creativity: Its focus is on meeting regulatory requirements rather than exploring better ways to address problems such as in data quality, security and synchronization.

The Amazon Time Sync Service provides time synchronization over Network Time Protocols. It has an observed accuracy of around 400 microseconds. Yet, multicast is not readily available in the public cloud. It has security and other complex issues. Why not learn from the current practices of high-frequency trading firms and self-aggregators when pursuing sub-microsecond precision?

Affordability and Other Discrepancies

Ecosystem degradation happens when damage is inflicted on others. This can be in the form of delayed access to information by subscribers of the public SIPs/CTPs, while trading venues’ proprietary products are unreasonably priced so that only a few elite players gain optimal access. It can also take the form of under-developing the public SIP/CT feeds in favor of self-interest to promote proprietary products.

Ecosystem degradation can also raise barriers to entry, requiring certain tools (e.g., smart order routers, transaction cost analyzers, liquidity sourcing, outsourced execution services) in order to have a reasonable chance to survive in the market.

The U.K. is a few months ahead of the EU in consultation on improving transparency. The Financial Conduct Authority is “prioritizing the benefits of immediacy of price publication over full disclosure of traded volume.” Fragmentation is inevitable under Brexit. Although the FCA’s efforts in collaborating with the industry to hash out many CT details is applaudable, we strongly disagree with the London Stock Exchange Group’s (LSEG) attempt to deter regulatory consideration of a market-wide request for a pre-trade equities CT.

In layperson terms, LSEG and New York Stock Exchange studies are about “queuing and wait time at the checkout counters.” We think slippage and other phenomena are related to the capability differences among lit exchanges, multilateral trading facilities, systematic internalizers and single dealer platforms (SDPs). The relative availability and price difference of mass market products (e.g., CT) versus trading venues’ proprietary products and Approved Publication Arrangements’ (APAs) value-added services is key. If the have-nots are willing to commit their limited resources to compete with the haves, they should be given affordable and comparable choices.

Values of Fairness

Transmission and availability are two different things. It is worth rethinking whether data should be required to be sent to the CTP and the whole concept of “trade reporting”. Instead of “send”, “obtain” or read-only permission to “wiretap” data legally at its source is a better approach. Wiretapping is the fastest approach and would eliminate the intermediaries. It also has the following advantages:

  • Consistency – The economy of scale for centralized data management, minimize data-in-motion for cybersecurity and privacy protection; data quality is no longer a problem because what being shared is fair to everyone, avoiding conflicts/arbitrations between multiple versions of truths.
  • Prevents a single point of failure – When one intermediary is down, X number of investment firms’ data would be missing. When a single firm’s connection with the CTP is down, the implication is far less. When the CTP is down, the experience will be consistent for everyone.
  • Values of a bespoke model connecting to everyone – Enable the direct administration and enforcement of rights and obligations, mass customization through the powerful infrastructure, no melding nor favoritism by intermediaries to distort or subjectively allocate incentives.

Regarding the "same manner, same method" provision under the US SEC’s Market Data Infrastructure Rule (MDIR), former SEC Chair Mary Jo White stated the need to “deemphasize speed as a key to trading success.” Time-lock encryption protects time-sensitive information from being decrypted prematurely. It eliminates the problem of where the CT data center is located.

Beyond the Velocity Factor

Who owns the data and who gets what should be dictated neither by regulators nor by a small group in a governance committee. Rebate tiering and competitive pricing of different market centers are analogous to private clubs favoring collaboration/outsourced trading.

CT or other financial infrastructures are meant for the long term. Policymakers should consider trading venues as different streaming platforms and recognize that the noumenon of rebate incentives serves as royalty payments for the use of others’ copyrighted material. Healthy development of the industry should focus not only on latency or the velocity factor, but also on three other V’s: veracity, variety and volume.

Authorities’ dismissing related market structure issues and doing the bare minimum in “checking the boxes” for market data reform is a race towards the bottom. It will not achieve the goal of “affecting competitive pressures for existing sellers of market data, resulting in cheaper, higher quality and more accessible data for its users.” Market reform should be about the divergence between private and social costs to delineate rights and obligations appropriately, as well as addressing extraordinary market volatility amid the transition toward “AI algo driven markets.”

 

Kelvin To (kelvin.to@databoiler.com) is a big data and financial technology platform innovator and founder and president of  Data Boiler Technologies.




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