Financial Institutions stress the critical need to include
pre-trade data into the European Equity Consolidated Tape
Key conclusions of Adamantia's analysis, the 20th of October 2022
Adamantia has conducted a feasibility study with a group of European sell-side and buy-side Financial Institutions among which Barclays, BNP Paribas, Crédit Agricole CIB, Deutsche Bank Group, Société Générale, UniCredit, and BlackRock who recently joined the initiative (hereafter "The Group") to assess the conditions of success and the economic viability of the European Equity Consolidated Tape ("CT") proposed by the European Commission as part of the MiFIR review.
This paper intends to share the Group feedback and recommendations on the latest proposals for the Equity CT.
Adamantia’s assessment has shown that there is a need for further consideration on how the Equity CT should be developed and run to ensure that it meets the needs of its users as well as being able to be economically viable. As outlined in our position paper published in May 2022 and further detailed below, real time pre-trade data is an essential piece of the Equity CT and must be included from the outset. In that respect the Group welcomes the encouraging propositions being made by the European Parliament in July 2022.
The paramount importance of including real time pre-trade data in the Equity CT is driven by two major considerations for the Group, obviously highly correlated:
the objective to provide the Capital Markets Industry with a trusted and usable CT which shall allow the realisation of a large number of use cases and be accessible to all investors at a reasonable price, and
the necessity for the CT to be economically viable, a prerequisite for any firm to envisage participating in its founding, for potential providers to position themselves and ultimately allow a European Equity CT to emerge.
THE NEED OF PRE-TRADE DATA - EQUITY USE CASES
Adamantia screened the applicable use cases across the investment value chain in terms of i) type of data consumed (pre-trade data, post-trade data, end-of-day statistics, historical data, market event) and ii) time of use (real-time, intraday delayed, end-of-day), with key subject matter experts from the participating institutions.
The table below presents, for each domain (ex: Front Office, Risk...) and function (ex: Liquidity analysis), the number of individual use cases consuming the different types of market data. As highlighted in this table, many critical use cases require pre-trade data, either on a real-time basis or intraday. Providing a limited access to post-trade data only will de facto severely lower the interest of the users in the CT.
PRE-TRADE DATA IS ESSENTIAL TO THE CT ECONOMIC VIABILITY
The Equity CT may only be successful in the European Markets if it is designed with a commercially viable business model. This can only be achieved with a value proposition that generates sufficient revenues to recoup the overall investment and recurring running costs of the Utility. As previously exposed in its publication of May, Adamantia analysis of the costs and revenues scenarios confirms that there is viable case for the set-up of a real-time pre- and post-trade Equity CT and coexisting with the business models of European regulated Exchanges.
The Group has carefully assessed the scenarios which could be envisaged as an alternative to a full real-time pre-trade CT covering all European venues, while still representing a commercially viable proposition:
BEST BID AND OFFER CT
In its draft report, the European Parliament states:
“For shares […], the CTP should comprise pre-trade data related to the best bid and offer. ESMA should also require the CTP for shares to be capable or at least to have the technical capabilities to consolidate and display pre- trade data related to the first five layers of order books.”
Our use case analysis indeed revealed the added value of consolidating five level of depth on pre-trade data, as this would increase the usage of (and interest in) the Equity CT. Nevertheless, the Group agrees that providing a continuous live stream of top-of-book pre-trade data represents an acceptable first step compromise and fits with a large number of targeted use cases, provided it is contributed on a mandatory basis by the venues.
The Group also considers that the Equity CT should give venues the freedom to contribute their full pre-trade information on a voluntary basis and propose a revenue sharing mechanism in line with the value contributed to the CT.
Consequently, the CT shall have the infrastructure ready to manage pre-trade data from the outset.
EBBO: AGGREGATION OF EVERY EUROPEAN TRADING VENUES’ BBO
The Group sees no benefits in obtaining an EBBO as the only output of the Equity CT. Retail and Institutional investors, market intermediaries and traders alike, require individual BBO data from each execution venue, on which basis they form their own aggregated BBO, related to the scope of venues they have access to, and in accordance with their execution policy.
POST TRADE ONLY CT
Adamantia analysis concludes that the scenario of a post-trade only Equity CT does not break even: the Group points out the lack of interest of only getting information related to execution points. Apart from a few use cases (such as Transaction Cost Analysis, ex-post Best Execution analysis, Portfolio construction/allocation, Valuation processes), getting a post trade only data would de facto invalidate the realization of most important use cases identified in our feasibility study, for both institutional and retail users (amongst others Pre-trade analytics, liquidity analysis, instrument pricing control, back testing, risk management and market surveillance), thus dramatically reducing the attractiveness of the CT.
It is worth mentioning that as part of such a post-trade Equity CT, snapshots of pre-trade data that would be broadcasted at the time of execution, e.g. once an execution has occurred, do not serve the purpose neither for professionals nor for retail investors, as this would deprive them of pre-trade information on a continuous basis, especially for less frequent traded stocks. Moreover, such a CT would need to be designed and sized to ingest the full set of BBO data, so from an economic perspective this would mean the same cost base as for a full pre-trade CT, but with significantly lower industry utilization, thus threatening the viability of the CT.
PROTECTION OF SMALLER EXCHANGES AND OPT-IN MECHANISM
The Group recognizes the importance of preventing the smaller European Exchanges from incurring potential excessive loss of revenues from market data, where this would severely impact their viability. The option of excluding them from the mandatory contribution to the Equity CT may be considered, provided it is limited to those venues that represent low fragmentation levels (or it will fail in its objective to consolidate the EU markets).
Nevertheless, our view is that opting-in to the Equity CT would be more beneficial for the small venues as it would noticeably increase the visibility of their listed shares, with positive outcomes for their business. In addition, the Adamantia business case on the real-time pre- and post-trade Equity CT shows sufficient returns to fairly reward all venues for their data contribution and in particular smaller venues which would benefit from an incentivised revenue redistribution mechanism.
The group thus fully supports the incentive mechanism, as part of the revenue redistribution mechanism, to convince these venues to participate in the Equity CT.
The Group welcomes the positive steps taken in the latest proposal of the European Parliament, pushing for the integration of pre-trade data into the Equity CT. The mandatory contribution of real-time BBO data represents an acceptable alternative to the provision of full pre-trade information but any further limitation would dramatically reduce the attractiveness of the Equity CT and as a result its economic viability. The above-mentioned necessary conditions are a clear pre-requisite for the Group to consider participating in the implementation of an Equity CT.
The Group remains attentive to new propositions for a truly beneficial and viable Equity CT for the European Capital Markets Industry.
Antoine Pertriaux, Partner at Adamantia Advisory
 The case for a viable Consolidated Tape on Equity, May 19th 2022, Adamantia Research: https://www.adamantia.paris/post/a-group-of-financial-institutions-assesses-the-viability-of-a-european-consolidated-tape-on-equity
 ECON draft report on MiFIR, July 19th, 2022: https://www.europarl.europa.eu/doceo/document/ECON-PR-731644_EN.pdf
 “Real time” does not mean low latency: it is important to remind that the CT is not intended to support use cases that require low latency such as trading applications which will continue to consume direct feeds from trading venues.
 A function is to be understood as a family of use cases. Each function may include one or several individual use cases, applicable for sell-side, buy-side and/or retail. As an example, liquidity analysis includes three use cases: trading strategy, block-size liquidity provision and venues selection.
 ECON draft report on MiFIR, July 19th, 2022, amendement 12