Is the equities tape slipping through Europe’s fingers?

What a year Sweden is having. First, Loreen takes home the Eurovision trophy on the 50^th anniversary of ABBA’s historic win, then Sweden’s presidency of the Council of the EU ties up a project that has eluded lawmakers since 2014. And with just one day to spare before its rotating tenure ended. Twitter conspiracy theorists must be frothing at the mouth.

The project in question is the creation of a consolidated tape for equities—a live stream of share prices designed to “bring more transparency and make market data more available,” according to Sweden’s own finance minister Elisabeth Svantesson. After chairing more than 2,000 meetings spanning everything from grain to the green transition, reaching an agreement on this crucial resource is the legislative equivalent of a mic drop. Thank you for the music, Sweden out.

Not everybody is thrilled about the news, however. European banks and fund managers wanted the tape to include substantial pre-trade data, reducing their reliance on expensive market data feeds from exchanges. Those hopes appear to have met their Waterloo.

When it entered negotiations in April, the European Parliament was calling for pre-trade data on the top-five best levels of bids and offers to be included on the tape in addition to post-trade prices. The Council proposed a snapshot of pre-trade data which would become available only after trades are executed. Sources say that the compromise struck last week is a real-time, anonymized European best bid and offer (EBBO).

The mood among European market participants seems to be one of glum resignation. Some say that this is the best deal they could have hoped for; others complain that the usefulness of the tape has been diluted in the trilogue negotiations. Without the ability to identify the venue which fielded the best bid and offer at the time of their trade, they say, it will be harder to challenge brokers on their execution.

The disappointment from some banks, brokers, and asset managers is understandable. But the model that has been agreed on by the co-legislators is far from useless. An end user of market data from a European bank told me that top-of-book pre-trade data can be used to test algorithms and hone future trading strategies, among other things.

The commercial rationale for a tape with an anonymous EBBO is less obvious, though. Why bother building an infrastructure that ingests pre-trade pricing information from every European venue only to overlay a filter that screens out their identities? The answer is probably either to reduce the scope for arbitrage or to allow exchanges to continue charging for attributed feeds, depending who you ask. Either way, it seems like an unnecessary complexity to add voluntarily.

There’s no point analyzing the arguments of both sides too forensically now that all is said and done. After all, this is when things really start to get fun. A host of questions remain unanswered.

Some are legislative, like the timeframe. Initial plans gave the future consolidated tape provider (CTP) just six months to bring the tape online after winning the tender. A spokesperson for a joint venture by 14 European exchange groups hoping to run the tape said that this would be a stretch, and hoped to extend the deadline to 12 or 18 months, which they said was needed to develop the feed handlers. With key details of the agreement still to emerge, it is unclear whether the timeframe has been set in stone yet.

Another key question pertains to the consumption of the tape. Will Esma, tasked with drawing up a technical standard for the tape, mandate that financial institutions subscribe to help cover the costs of producing and running the tape?

The only candidates who have so far come forward with bids to run the tape are the 14 European exchange groups and a group of financial institutions operating in Europe. The financial institutions said that they would only continue with their bid if the model for the tape met their conception of a minimum viable product: the top-five levels of best bids and offers. It is doubtful whether the group’s members will wish to continue with their bid now that it’s clear the tape will display only an anonymized EBBO.

In all this excitement, it’s easy to forget why Europe is doing this in the first place: it all comes down to money, money, money. Europe’s ailing markets are struggling to compete internationally. The Commission, which brought the consolidated tape back on the agenda in 2020, saw it as a central pillar in its Capital Markets Union plan—a blueprint for a pan-European capital market intended to bring more foreign investment to Europe.

The US has had a consolidated tape for two decades now, including top-of-book pre-trade data. In that respect, Europe is still playing catch-up. This may explain why lawmakers were so keen to reach a deal before the Swedish presidency ended.

But rather than scrambling to come into line with America’s precedent, Europe should be taking this opportunity to think about how it can leapfrog its rivals with world-first innovations and ambitious reforms.

It’s too early to jump to conclusions on the consolidated tape. We won’t know the full details of the deal until the provisional agreement is adopted by both the Council and the Parliament. And even then, it is perfectly possible that the scope of the tape will be expanded to include richer data once it’s up and running.

By agreeing on a model for a tape, the EU has taken a first tentative step towards a more modern market. If it wants to compete internationally, it will need to think big and not moderate down its ambitions. Europe must find a new way to face a new tomorrow.