One versus many: Firms question viability of UK CT model

Market data users and market participants are concerned about the viability of the UK consolidated tape (CT) if the government adopts a model that allows for competing providers to come forward, rather than allocating a single vendor as CT provider (CTP).

Daniel Mayston, head of electronic trading and market structure at BlackRock, says any CTP will have to make massive investments to build their offering, and a competitive model would diminish the promise of good returns.

“They would know that they are competing rather than being awarded an exclusive contract or tender, and that the share of revenue that is up for grabs is automatically reduced by having multiple providers,” Mayston says.

On March 1, Her Majesty’s Treasury published the response to its consultation on the Wholesale Markets Review, a review of the UK’s financial regulation post-Brexit. In the response, Treasury says that promoting competition and allowing multiple CTPs to come forward would help meet the overall aims of having a high-quality and low-cost CT service—as intended under the Markets in Financial Instruments Regulation and its attendant directive (Mifir/Mifid II), the EU rulebook that was folded into UK regulation after the nation left the EU.

Under a competitive model, several UK CTPs would have to fight for their share of a limited revenue pool. The European Commission has taken a different approach, saying in a proposal for the CT that a single tape provider will be awarded a contract for a five-year fixed term, and there will be one CTP per asset class (fixed income, equities, ETFs, and derivatives).

UK lawmakers and the Financial Conduct Authority (FCA) have told market participants during industry forums that they favor competition because it will allow for the best and highest quality tape provider to emerge naturally.

Neither the FCA nor the Treasury responded to multiple requests for comment for this story.

Since the Treasury published its review, market participants and industry associations have been challenging its rationale for a competitive CT model. Critics argue that competition is typically good for most kinds of markets, but not when it comes to a cost-recovery service like the consolidated tape.

BlackRock’s Mayston says that under the UK government’s approach, vendors would compete on providing what should be the exact same service—one that is high quality and low cost. But there should be no competitive edge to gain in the provision of the CT.

“A consolidated tape is about having a universal record of trades or a golden version of the truth. That is where I see a challenge around having multiple consolidated tapes: you’re nearly by construction creating multiple versions of the truth rather than one single version of the truth,” he says.

The viability of the tape is a leading concern for many. Any vendor that came forward as a CTP would have to replicate the labor and absorb the costs associated with building the CT before they were aware of how much market share they could expect to attract.

“We don’t think it’s viable. If there are 10 of them [CTPs] and they only get 10% of the market, the cost benefits will not be there,” says Stephane Malrait, global head of market structure and innovation at ING.

The burden entails building connectivity to the different trading venues and Approved Publication Arrangements (APAs), aggregating, cleansing, and publishing the data, in addition to handling payments and tech management costs. The CTs will also have to absorb the expenses that come with operating in a competitive environment, like hiring sales and marketing teams.

“So if there is less revenue but the same costs, it will be a lower return, not a higher return. It’s difficult to see why or how the argument holds up that this would reduce costs or give a lower-cost version to consumers,” Mayston says.

Liz Carter, managing director of trade reporting and clearing at Tradeweb, says CT candidates might be discouraged from even coming forward due to the high overheads and lower revenue opportunities. This is a concern, she says, that the UK regulator should be heavily considering.

“The competitive nature creates increased risks around cost recovery, which ultimately ensures commercial viability. Before continuing with this approach, we’d urge the FCA to consider all the potential risks, including a scenario where no CTP emerges,” Carter says.

Surcharge for all

Many also worry that adopting this approach would not only mean higher costs for the CTPs, but also for users of the data and even data contributors such as the APAs and venues, which are mandated to provide data to the CT under Mifid II.

“A multiple tape model would mean that trading venues and APAs would have to give data to an undetermined number of sources, as it’s still unclear if a cap will be introduced on the number of CTPs. This would add more layers of complexity and would also inflate both costs and resources,” Carter says.

Malrait says multiple competing CTs running on tight revenue margins could take many years to build a high-quality tape—meaning users could have to purchase data from several of the CTs to get a complete view of the market. Data consumers would also have to find the time and resources to evaluate the different data models and delivery methods used by vendors in the first place, to determine which one they would be confident using.

For example, firms might have to analyze a week’s worth of data from each CTP to better understand their version of the “truth” when it comes to the aggregated market view, Malrait says.

“They might have eight different answers [or versions of the CT] because they must apply different logic to describe the ways they develop their tape. Why should they remove duplicates? How do they decide that the trade is duplicated? Should I remove what they consider as internal trades or fat finger trades, erroneous trades, etc.?” he adds.

In the Wholesale Markets Review, Treasury says it believes the priority should be on developing a fixed-income consolidated tape ahead of equities or other asset classes. To qualify for a consolidated tape in fixed income in the EU, the vendor must cover a minimum of 80% of the market. It is still not clear whether the UK will adopt the same qualifying approach. If it does, in the case of a competitive CT market, firms worry that having multiple tapes with partial visibility will only give rise to the same issues with data fragmentation that exist today, where asset managers are forced to pull data from multiple APAs and venues to gain a view of the market.

The FCA could also have to absorb extra costs to monitor and supervise the multiple CTPs to ensure they meet the criteria in terms of data quality and delivery—at a low cost. The regulator will have to manage a more complicated governance framework to keep tabs on each CT.

Neil Ryan, CTP lead at Finbourne Technology, one of the candidates vying to become an EU and UK CT, says if there are several CTPs with different tapes—including different aggregated solutions, data, and delivery methods—this makes it much harder for the regulator to manage and supervise.

Malrait says many firms, including ING, have proposed that the UK could follow the same approach as the EU and allow the CT candidates to compete for a single contract through a tendering process.

“Instead of taking several years, take several months to decide which one you think is best. The competition is there, you do a request for a product and it’s open to everyone. If 10 of them want to apply, they can apply and then you have a beauty contest to select which one is the best,” he says.

Who are the players?

There are several candidates that have come forward and have publicly expressed interest in becoming the EU consolidated tape provider—among them are Ediphy, Finbourne, Propellant, and TransFicc. Several others, such as Etrading Software, have also stated their interests in the initiative, and there have been rumors of two consortiums, one founded by banks and another that combines the efforts of the three major rival market operators in fixed income: MarketAxess, Bloomberg, and Tradeweb.

For many of these candidates, a big decider on whether they will choose to become a CTP for the UK market rests on winning the EU prize first.

Christopher Murphy, CEO of Ediphy, says his firm will compete for business as a UK CT if it wins the EU tender. If Ediphy is not awarded the contract, he says it will have to assess whether it is viable for the company to put an offering forward.

“In terms of the cost of running it and the core infrastructure, the task is very similar for the UK and EU tape. There are a lot of fixed costs that you need to bear to just do one of them. Adding a second is, relatively speaking, quite simple and quite cheap. So, I think anyone that wins the EU tape will have an immediate competitive advantage in being able to offer the UK tape at a very competitive price,” he says.

Finbourne’s Ryan says he expects candidates to drop out of the race as time goes on. The biggest challenge for any vendor entering the space, he says, is coping with the data quality issues.

Ryan says that while the Treasury is keen to have a competitive model in the UK, Finbourne hasn’t changed its business objectives to provide a CT and help rectify the data problems. But he says Treasury’s approach does make things harder from a business perspective. “What it does lead to is pressure on the business model, that’s for sure, if there are more competitors out there,” he says.

Outside of the competitive concerns, there are a host of other reasons why some candidates might decide not to put their names forward for the UK CT. Ryan says some could be put off by the cost of building a low-latency tape or the feat of building one for the UK might not be worth their while.

“For example, if I look at building real-time tape, that would be considerably more expensive than salespeople, so even within the scale of things, this is a factor,” he adds.

There is no indication yet when the industry can expect more clarification on what the UK tape will look like or what the next steps are for the industry. But sources tell WatersTechnology that industry associations are continuing to lobby the regulator to reconsider its position on having a competitive tape model.