By Kelvin To, Founder and President, Data Boiler Technologies
The UK and the EU are charging forward in planning a single Consolidated Tape (CT) for each asset class in their respective region. The British and the Europeans are reckoning that the US’s Decentralized Consolidated Model (DCM) under Market Data Infrastructure Rule (MDIR) is impractical. This means that the CT Provider (CTP) in Europe would in essence operate as a public utility (i.e. without competition for likely 5 years at least). The question is – how a “public” utility would have data licensing framework on a “reasonable commercial basis” (RCB) that satisfies the needs of different stakeholders? These needs include the licensing terms allowing the CT data to be re-used to create derived services, provide other licenses for direct use of data without re-use rights, as well as a revenue-sharing scheme with market data contributors (MDCs). Let us decipher and see if a viable framework can or cannot be worked out.
According to the DotEcon Report, obstacles to the emergence of a CTP in both the UK and EU include:
- Data access issues – Trading Venues (TVs) and Approved Publication Authorities (APAs)’ monopolistic power;
- Demand uncertainty – (a) sensitivity of business case, (b) user segmentation, (c) differentiated licenses; and
- Incentives for full coverage; commercial negotiation with multiple counterparties if absent intervention on the terms of access is infeasible; and the related implications of the fragility of a CTP’s business case.
These obstacles varied for the Equity CT versus the Fixed Income CT. For example, TVs and APAs hold extensive power over market data in equity. The situation is like a pirate copy of MP3 songs being broadcast freely at no cost to the “streamers”/ Jukebox operators. Government intervention is necessary and the EU policy makers are willing to do so, such as “obligating market data contributors to provide the CTP with all the market data under the new Article 22b(2) in MiFIR, in a harmonized format, through a high quality transmission protocol, and as close to real-time as is technically possible.” In addition, keeping the consolidated European best bid and offer (EBBO) information anonymous avoids the sensitive talk of whether the SIX-Group’s Swiss EBBO is the de-facto EBBO or not.
For fixed income, market data is one of the components to foster European bond markets’ growth. Learn from the FINRA’s TRACE recalibration in the US to formulate a strategy to suit the issuers’ and the investors’ appetites. It would yield some fruitful results in the furtherance of market electrification. Difficulties arise from obtaining reference data, such as rating information from all 3 big Credit Rating Agencies (CRAs) to get the full near-universal coverage of debt instruments. Vertical integration along the value chain, with combinations of TVs, benchmark administrators, market data vendors and CRAs being part of the same corporate group is nothing new. The motive could simply be trading venues face competition globally. How they would come into an agreeable licensing framework on an RSB may turn out to be a private party behind closed doors. Policy Makers should not let that happen under any circumstances.
The cost to build a CT is substantial. The data storage cost is comparable to the Consolidated Audit Trail (CAT) project in the US if the content requirements are similar to the US MDIR with depth-of-book, odd-lot, etc. Both the CAT original funding and proposed executed share models are inequitable, see this. Also, Trading Venue Perimeterincreases the numbers of MDCs in scope overtime. To address data non-standard issues of different MDCs, CTP’s enterprise service “bus” (ESB) is more like a “limousine”, i.e. very expensive. Mandating MDCs to provide data in harmonized format to the CTP may ease a bit on the CTP’s ESB connectivity cost, however, it introduces latency. “Same format” hurts average investors and gives High Frequency Trading firms (HFTs) a permanent advantage. One can only attempt to match faster connectivity by altering the data formats and the compression methods. Latency gaps would determine how big a difference is in the demand of the CT.
Without putting the right parameters to bound performance, “same manner and methods” provision under the US MDIR requirements it is merely a standard price list. Neither is it equivalent to Latency Equalization, nor can it achieve the same results as using time-lock encryption (TLE) to make market data available SECURELY in synchronized time. “Oblige trading venues and their members or participants, systematic internalizers (SIs), APAs and CTPs to synchronize their business clocks to record the date and time of any reportable event” is NOT enough. Policy Makers should mandate the use of TLE (NOT a speedbump) to properly address aggregation distance/ location differential/ bandwidth issues.
Research has shown that Exchanges may optimally restrict access to price information by charging a high fee so that only a fraction of speculators buy their proprietary products (PP). As long as the CT is NOT in competition with PP, and/or dominate the TVs and the APAs incur almost no incremental cost to become a CTP, they would not mind the CT acting as a second line product to generate additional profits for the MDCs under the revenue-sharing scheme. Elites may persuade the industry to make compromises and turn to their favors in adopting a near real time CTP “cloud” solution, when it is indeed unfair to latency disadvantaged market participants. Policy makers should reject such plans that further fragmenting the markets.
Access fee rebate, PFOF, and market data/ market structure issues are all intertwined. Schwab’s empirical evidence proved that “Order routing revenue and price improvement are NOT zero-sum”. The noumenon of rebate incentives serves as royalty payments for the use of others’ copyrighted material. When one is not required to pay for the use of others’ intellectual property, streamers would exploit the content creators with rent seeking behaviors and/or selectively paying rebates and other perks to the elites like George Orwell’s ‘Animal Farm’. Licensing frameworks “based on costs incurred to provide the data” only leads to endless arguments (see the different perspectives from IEX , NASDAQ, and others). Market reform should be about the divergence between private and social costs. Inequity cannot be measured by accounting costs.
Aggravation and mistrust of government policies are on the rise in the cyberpunk era. Policy Makers should serve the public interest to create laws that uphold justice. Heed the lesson learnt from the music industry. Delineating copyright and royalty payments for fair use of creative works benefits every constituent and grows the overall pie. The phase out of PFOF by 2026 in EU should transition to an equitable “Copyright Licensing Mechanism”. Rate setting is objectively based on 4-part test to address the longstanding issue of: who owns the data, what gets paid and who get what. Nevertheless, it is better to have some level of order protection than the ‘false hope’ of BestEx or disclosure rules.
Wholesale data reform should be about reaching a wider audience, increasing the number of diversified participants, reducing unknown unknowns, and improving liquidity and market efficiency. By putting a value on quotes and trades composition, proper considerations will be given to eliminate conflict of interest, as well as ensuring efficiency in deployment of resources, rather than engaging in non-productive fights that destroy values. Pareto improvement is achieved when someone is better off without anybody worst off or win-win for all.
We at Data Boiler believe the overall pie can be grown and data licensing framework on a reasonable commercial basis is viable and achievable. TLE promotes FRAND. Obfuscation techniques can preserve confidentiality of trade strategies while rights to claim ownership of data by broker-dealers can be asserted. Our tech innovations are patented in the US and Canada, pending in EPO and other countries. Innovations would spur new economic opportunities and customer values. Shaking-up how market structure should work for the benefits of all. Be open-minded to consider our suggestions in here.
