The EU consolidated tape proposals have undergone significant revision to get to their current form, with a key change being the removal of in-depth pre-trade data. There are arguments both for and against – but could it all just come down to the bottom line? ANTOINE PERTRIAUX, co-founder of specialist CT consultancy Adamantia, warns that the exclusion of pre-trade data could make a consolidate tape fundamentally unviable from a cost perspective. Â
Adamantia, a specialist consulting firm based in Paris, last year conducted a feasibility study with a group of European sell-side and buy-side financial institutions including Barclays, BNP Paribas, Crédit Agricole CIB, Deutsche Bank Group, Société Générale, UniCredit, and BlackRock to assess the conditions of success and the economic viability of the European equity consolidated tape. One of the primary findings from the study, argued the group, was that the inclusion of real-time pre-trade data was essential for its success – and without it, any tape would struggle to succeed. We spoke to co-founder Antoine Pertriaux, to learn why he believes this element is of such importance:
The background
“The European Commission introduced the consolidated tape proposal and decided to outline the key features but leave the industry to organise and propose solutions to build and run it. Our initial study focused on what the service should provide in order to be truly beneficial for the industry. We went into detailed analysis of use cases across the front-to-back value chain for both the buy- and sell-side to establish what it would look like: for each targeted function, what type of market data is needed (post trade and/or pre-trade), the timing of use, whether intraday, real time and so on.
“Across the various functions, we went through a series of about 50 use cases where we were able to identify what was really needed, and the conclusion very clearly was that post-trade data would not be enough. To have a beneficial tape, it would need to include pre-trade information with a certain level of depth in order to allow the maximum usage of this content for the users.
“To have a beneficial tape, it would need to include pre-trade information with a certain level of depth in order to allow the maximum usage of this content for the users.”
The assessment
“The first point was whether it would be viable economically. The second point was to validate the technical feasibility and what the cost for that would be. At the time, there were lots of numbers flying around saying it would cost EUR100, 150 million to develop. We needed a more realistic number, so we did it ourselves.
“We discussed the issue with specialised technology partners through an RFP to assess what we would be the real cost of building and running a tape. We then evaluated the potential revenue based on the target market for the full pre-trade tape. We created a business case which was, to us, largely viable – meaning that revenues would easily recoup the running costs and investments, and also provide additional benefits for redistribution to the exchanges and source providers.
“We shared our conclusion with the European Commission and other parties involved, and provided them with concrete examples of why the tape needed in-depth pre-trade data, over a series of long discussions.
The debate
“But then came the final Trilogue. The European Parliament was largely in line with our view, and they published their own thinking on that, confirming that the tape should include both pre- and post-trade with five layers of information depth for pre-trade, which was perfectly in line with our own conclusions. However, the European Council took the opposite view.
“The final consensus at the end of June, as you know, concluded that they would go for real-time, anonymous EBBO data – the rest would be post-trade data only. Based on that, we need to completely re-assess the commercial outlook for a consolidated tape.
“In our view, there will be less demand for this tape, which means that it may not generate sufficient revenues to recoup costs.”
The concerns
“Now that we have the final shape of the tape, we need to revise our initial assumptions because obviously, as we won’t have full depth of pre-trade information, the addressable use cases will be much more limited. In our view, that means that there will be less demand for this tape, which means that it may not generate sufficient revenues to recoup costs.
“Why? Because on the cost side, having a full pre-trade tape or just an EBBO tape doesn’t actually make much difference in terms of architecture and sizing of the solution. The tape will still have to consume all top of book pre-trade data from the various European venues and aggregate it to calculate the EBBO. So in terms of volume of data, there’s not much difference, and the overall costs will be similar.
“But on the other side, you will have less revenue, because market interest will be lower. Economic viability is obviously a prerequisite for financial institutions to participate in such an initiative. If the tape doesn’t achieve that, will we see alternative proposals to the official one, perhaps? It’s too early to conclude at this stage – but what we can say clearly, is that there is a huge difference between the full pre-trade tape supported by the European Capital markets Industry and what has since been proposed, which is far less ambitious.
The conclusion
“The viability under the pre-trade tape was a given. It is no longer obvious. The large firms will probably still find ways to make use of this data – and pay for it because it won’t be free – But what about the smaller players, the smaller sized asset managers across Europe, of which there are many? Will they see a benefit to using this limited tape, or are they likely to just continue consuming delayed data, for free, as they do now?
“We are currently conducting a survey to market participants to gauge their appetite on the subject. It’s a critical path to conclude on this central question of viability, before engaging further to the development of the consolidated tape. “
©Markets Media Europe 2023
