Does a consolidated tape need “cafeteria-style pricing” to be successful?

MFA says Introducing a UK consolidated tape  will improve transparency, promote liquidity, and encourage competition.

This article first appeared on Best Execution, a Markets Media Group publication.

The US-based Managed Funds Association (MFA), which claims to be “the voice of the global alternative asset management industry”, has written to the UK’s Financial Conduct Authority (FCA) urging for a flexible approach to consolidated tape consumption and pricing – warning that an “all or nothing” subscription approach will not fly – and that revenues should not be shared with data providers. 

In a letter sent to the FCA’s Stephen Hanks earlier this month the MFA – which represents over 170 member firms, including hedge funds, credit funds, and crossover funds that collectively manage nearly £1.7 trillion – urged for the swift implementation of a consolidated tape for fixed income in the UK. The letter, which came in response to the FCA’s recent consultation paper on a fixed income tape framework, also recommended that the regulator consider an equities tape to “improve the proper functioning of markets”.

Equities needed

“Introducing a consolidated tape will improve transparency, promote liquidity, and encourage competition. Providing accurate, cost-effective, and timely market data will enhance the ability of alternative asset managers to deliver for their investors, including UK pensions and charities,” said Bryan Corbett, president and CEO of MFA.

“We encourage the UK government to also pursue a consolidated tape for equities as part of their efforts to benefit investors, improve markets, and help secure the UK as a premier financial centre.”

The association suggested that because most stocks in the UK trade on the London Stock Exchange, this single source of trade data could enable the UK to sidestep the “commercial and territorial discussions” that have hampered the ability of an equities CT in the EU.

“While the introduction of a fixed income CT is an important first step, both from a commercial and markets perspective, the benefits of price transparency to the markets more broadly cannot fully be realized without an equities CT,” stressed the MFA. An equities CT should include pre-trade data if possible, as well as including data on market outages, said the association. However, it’s more important to get one up and running as quickly as possible, even if that means only post-trade initially.

Cafeteria-style

However, the association warned that for a UK consolidated tape to be successful, it must include not only fair pricing and reliable data, but flexibility in terms of usage, so that managers only need to subscribe to the data sets they need.

“No manager should be obligated to accept an “all or nothing” option to subscribe,” said the letter. “Rather, MFA urges the CTP to offer “cafeteria-style” pricing where managers can determine the data sets they need and subscribe to those CT class(es) accordingly.”

The MFA warned that managers today obtain trade data from multiple sources, and any CT would necessarily be competing against those legacy sources, so competitiveness in terms of pricing will be essential.

“Firms should not be mandated to use any or all of the CT data, including historical data or value-added data created by the CTP, but should be allowed to select the data sets needed by that firm,” stressed the association.

No revenue split

The MFA also called for any tape to be priced on a “reasonable commercial basis” and stressed that the CT should not be required to share revenues with the data providers. Instead, as with TRACE (the US version), the data should be free after 15 minutes.

“Revenue sharing arrangements would leave the CTP beholden to the data providers and incentivise the data providers to negotiate for a greater revenue share over time, driving up costs to the CT subscribers.”

Any equities tape should be constructed on the same model, said the MFA, again without requiring subscription to an aggregated tape.

“There is no legitimate need to mandate that managers and others subscribe to the CT. Any such mandate would only incentivize the CTP to price the data as exorbitantly as possible since it not only has an FCA-conferred monopoly, but an entirely captive base of subscribers that would have no choice as to whether to subscribe. There would be no incentive for the CTP to invest in technology or systems to help drive faster or more accurate transmission of data. MFA would vigorously oppose any effort to mandate consumption of the CT data.

“IF THE SUBSCRIPTION FEES CHARGED BY THE CTP ARE NOT REASONABLE, THE CT WILL FAIL.”

Cost benefit

The MFA highlighted the competitive benefits to the UK of implementing a CT swiftly, comparing it to the success of the US version.

“The benefits of CT to the fixed income markets in the US, as evidenced by TRACE data, have been considerable, with the benefits increasing the most for less-liquid bonds,” said the letter. “One study found that transaction costs [for fixed income securities] decreased by approximately 10% following trade reporting, with large reductions found for less-liquid transactions, such as block trades and bonds with lower dealer competition.”

The benefits of transparency also would extend to equity securities, which tend to have higher transaction costs.

Keep it simple

The MFA supports just one CT provider per asset class. “The emergence of multiple CTPs per asset class would increase transmission costs for the trading venues as they would be reporting the same data to multiple sources and would seek to recoup those additional costs through levying higher fees to the CTPs for the trade data.”

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