MiFID III pooled trade data tape may shine a light on EU markets

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Asset managers, brokers and market makers could get more market transparency as European Union regulators expedite long-considered plans to create an electronic system that collates trade data from trading venues and data aggregators – a consolidated tape – with MiFID III proposals due by end of Q3.

However, a new report from Bloomberg Intelligence (BI) states that, despite this transparency, data bills for asset managers, brokers and market makers are unlikely to go down and exchanges could see data revenue drop.

Bowing to industry pressure, regulators will likely widen their preliminary proposal beyond just equities to cover bonds, ETFs and certain derivatives, marking a positive step forward. But while Brexit-induced liquidity shifts give added impetus, the diversity of the EU bloc's markets makes data-tape creation a much trickier task than in the US.

Sarah Jane Mahmud, Senior Government Analyst at Bloomberg Intelligence, says: “With formal proposals due by the end of Q3 and plans to launch a beta version for testing in 2023, a bloc-wide real-time data tape is unlikely to be market ready by 2025. The proposals may now be wider in scope, encompassing bonds, ETFs and derivatives as well as equities. Extensive legislative changes would be necessary to make CT-provision commercially viable, including new rules on data quality and pricing. UK policy makers, meanwhile, are pressing ahead with plans to create a national post-Brexit CT with a 1 July consultation.”

Nearly three quarters (71 per cent) of respondents to a Bloomberg Intelligence survey backed the move, with this rising to 89 per cent among larger firms with heavier cross-border business. While the introduction of CT could lead to deeper market transparency, firms are also that trading costs could rise if regulators make consumption mandatory and force asset managers to pay for a bulk of data they don't need and won't use. As a result, only 58 per cent of small firms surveyed were in support of the move.

The MiFID II changes on the horizon could spur the creation of a CT provider, notes BI. While the rule sought to establish a regulatory environment for competing CT providers, not one materialised, it adds, chiefly because it provides little commercial incentive.

Sarah Jane Mahmud says: “First, MiFID II provides no recourse over poor-quality data submissions. Second, it doesn't tame the cost of negotiating, purchasing and integrating data from dozens of trading venues and off-venue post-data aggregators. Third, a CT provider may have added latency due to aggregation, with data published more than 15 minutes late having no commercial value.”

Looking ahead, regulators, in the interest of costs, look likely to appoint a single, exclusive CT provider on a limited contract, subject to evaluation every five to seven years. But other firms may not be banned from providing similar services: they'd just not be able to compete under the same conditions as potential new mandatory contribution/consumption rules wouldn't apply.

Also, without a strong governance framework and robust regulatory oversight, there's risk that a sole-source CT provider might charge monopoly rents or be unresponsive to market needs. While this monopolistic approach would mirror the US set-up, it should be highlighted that the SEC recently ruled to open it up to competition.

In the event no CT provider emerges under MiFID II, the rule permits regulators to appoint via public tender a company to operate a CT.