This paper explains why a post trade Equity CT cannot be a reliable source of information for the market participants’ decision-making when trading stocks on EU markets
Adamantia Research | June 2023
Part of the MiFIR review, the framework and content of the Consolidated Tape (CT) on Equities is being debated by the EU legislators, with opposing views on whether to include real-time pre-trade data or limit the reach of the CT to post trade information only.
Our analysis of the stocks in several French indices, representatives of European Equities – CAC Next 20, CAC Mid 60 and CAC Small – provides the evidence that a CT limited to post-trade-based information is in practice unusable for the investors:
Apart from top liquid stocks for which trades are executed every fraction of a minute (ex: CAC 40), periods of time without a trade execution are of regular occurrence for many of the other stocks and the elapse time between two executions can exceed several tens of minutes for less liquid stocks:
Our sample normal day of trading on stocks in the CAC Mid 60 index indicates that a post-trade CT would leave investors blind with an information on the price and volume older than 5 minutes during 26% (2h13min) of the time on average, up to 64% / 5h28min for some stocks;
Similar analysis on stocks in the CAC Small index leads to ‘blind’ periods of 3h42min (44%) on average with information older than 30 minutes, up to 95% of the day for some stocks;
Even with the more liquid stocks in the CAC Next 20 index, investors will face outdated information greater than 2min during 28% of the trading day (2h22) on average, up to 59% (5 hours) for some stocks.
During these periods without executions:
Investors would find themselves blind, the only information available being the last execution broadcasted by the CT a few minutes (sometimes tens of minutes) earlier;
Our analysis shows that price variations can be considerable (up to 5% for some stocks between two execution points in our sample of a normal trading day), meaning that investors would have benchmarked on a basis of outdated market prices with an increased risk of trading at wrong levels.
The absence of pre-trade data disseminated by the CT in real-time would prevent them from assessing the liquidity and the potential price movements required for any investment decision.
As a consequence, a post trade only CT cannot be used as a reliable and sufficient source of market data for investors. And because the data is unreliable, investment firms will not purchase it. Hence such CT will not be commercially viable, and ultimately will fail.
RESEARCH BACKGROUND AND OBJECTIVES
The revision of the Market in Financial Instrument Regulation (‘MiFIR’) package includes the creation of a Consolidated Tape (‘CT’) to foster the development, attractiveness and competitivity of the European Capital Markets. The objective is to provide a consolidated view on the available liquidity of traded securities in the EU through the aggregation of core market data into a centralized infrastructure, accessible to all types of investors at reasonable costs.
While the sell-side and buy-side industry strongly advocates for a real-time Equity CT encompassing both pre-trade (with 5 levels of bid and offer quotes) and post-trade data (executed trades) to deliver the expected outcomes, in line with the proposal of the European Parliament, an alternative option of a less ambitious post-trade CT is being contemplated by the European Council.
In practice, the proposed post-trade CT would provide the users with a partial set of information, limited to the execution points (e.g., only when a trade occurs):
Execution price and volume for each executed trade on a EU trading venue, and
A “snapshot” of pre-trade data “at the time of execution”, e.g., BBO quote reflecting the prevailing limit available in the order book immediately before the trade occurs.
The purpose of this paper is to explain why such a post trade Equity CT cannot be a reliable source of information for the market participants’ decision-making when trading stocks on EU markets, in analyzing real-life situations with a sample of EU stocks.
WORKING ON A REAL-LIFE EXAMPLE
In this section we focus on the French market with Euronext CAC Next 20 index, consisting of the 20 highest ranking companies listed on Euronext Paris that are not included in the CAC 40, and the CAC Mid 60 index, comprising the second 60 largest and most actively traded shares listed on Euronext Paris.
While our analysis covered all shares from the CAC Next 20, CAC Mid 60 and CAC Small indices, the explanation in this first section focuses on two stocks with different liquidity profiles:
Virbac (ISIN: FR0000031577), part of the CAC Mid 60, and
Air France KLM (ISIN: FR0000031122), part of the CAC Next 20.
Note that shares in the CAC 40 index – for which trades are executed every fraction of a minute – have been voluntary excluded from our analysis. It is important to remind that one of the main drivers of the CT is to boost the attractiveness and trading volumes of EU markets beyond the most liquid shares, hence the choice of the CAC Next 20, CAC Mid 60 and CAC Small indices for this analysis.
For each of these two stocks we collected the executions (the executed trades with related volumes) which occurred during a full day of trading on Euronext and measured the time delay between each of the execution points, reflecting what the investors would see in a post-trade only Equity CT. We then extracted the execution points separated by a time elapse of more than two minutes as a basis for our analysis.
We focused on two classical trading days – May 11th and 16th 2023 – with no specific event on the markets impacting the trading session of these days. The quantitative findings hereafter hold in the same way for any other normal trading day.
EXAMPLE 1. A LOW LIQUID STOCK | VIRBAC
First of all, we analyzed a low liquid stock in the CAC Mid 60: Virbac.
The chart below presents all the executions which occurred on May 11th on Virbac, and the related execution prices.
A total of 250 trade executions was spread over the trading day. As recorded in the table in appendix, 33 trade executions were separated by more than 2 minutes, of which:
17 trade executions were separated by 2 to 10 minutes;
7 trade executions were separated by 10 to 20 minutes;
9 trade executions were separated by more than 20 minutes (up to 51 minutes).
Let’s focus on the trading window between 11:08:05 and 11:47:43 as shown in the chart below:
In this example, no trade execution occurred in a 39-minute window. With the proposed post-trade CT, the last information provided to the investor is the execution of a volume of 3 Virbac shares at 11:08:05 at a price of 300.5 EUR, together with the best bid and offer ‘at the time of this execution’. The next execution comes at 11:47, with 4 Virbac shares traded at 301.5 EUR (0.33% price increase).
This means that during the following 39 minutes the investor will get no refreshed information from the post-trade CT on Virbac stock price and bid/offer quotes posted in the order book, making it impossible to assess the available liquidity and price movements.
Let’s assume the investor wants to analyze the opportunity to buy 10 Virbac shares at 11:45, e.g. 37 minutes away from the last execution on Euronext:
Is the last traded price of 300.5 EUR a good guide to the next possible trade price?
What did the quote look like immediately after the last execution of 3 shares?
What is the current quote and underlying liquidity available at this price (depth of book)?
What will be the market impact if he/she sends his buy order in the market (will the volume of his order impact the price and to which level)?
The investor will not be able to answer these critical questions.
And as pointed out above, this example is not an isolated case for this day. Let’s calculate the total time in the day during which the investor will be left with an outdated information (last price and volume) on the stock older than “x” minutes as illustrated in the figure below:
The table below presents the cumulated time in the trading day where the investor will get outdated information from the post trade CT for this stock:
In the example of Virbac, there are 16 executions separated by more than 10 minutes, representing a total time of 4h13min (50% of the trading day) during which the investor will have an information on the price and volume dating back more than 10 minutes.
In this example on Virbac, a post-trade based CT would not be able to sufficiently support investment decisions for the investor, as it would leave him blind of refreshed information on the stock for a large part of the trading day, with the risk of trading at wrong levels.
EXAMPLE 2. A MORE LIQUID STOCK | AIR FRANCE KLM
In this section we analyzed a more liquid stock, Air France KLM, part of the CAC Next 20 index.
We focused on the same trading day – May 11th 2023 (again, no specific event on the markets impacting the trading session of that day)
The chart below presents all the executions which occurred on May 11th on Air France KLM, and the related execution prices.
As shown in the chart above, Air France KLM stock is much more traded than Virbac (10+ million stocks traded on the 11/05). However, on the given day we can still observe 123 trade executions separated by more than one minute, of which:
14 trade executions were separated by 2 to 3 minutes;
6 trade executions were separated by more than 3 minutes.
Let’s focus on the trading window between 14:24:57 and 14:27:26 as shown in the chart below:
In this example, no trade execution occurred during 2.5 minutes. With the proposed post-trade CT, the last information provided to the investor is the execution of a volume of 346 Air France KLM stocks at 14:24:57 at a price of 1.4975 EUR, together with the best bid and offer ‘at the time of this execution’. The next execution comes at 14:27:26, with 1,000 Air France KLM stocks traded at 1.5 EUR (0.17% price increase).
Again, this is not an isolated case. The table below presents the cumulated time in the trading day where the investor will get outdated information from the post trade CT for this stock:
In the example of Air France KLM, there are 20 executions separated by more than 2 minutes, representing a total time of 33min during which the investor will have an information on the price and volume dating back more than 2 minutes.
While the time elapse between two executions is much lower for a more liquid stock such as Air France KLM, the investor would be facing the same situation as previously described for Virbac, e.g., he would get no information on the latest bid and ask quotes during few minutes, preventing him from assessing the liquidity and the potential price movements required for his investment decision.
HOW REPRESENTATIVE ARE THESE EXAMPLES?
The two examples developed in the previous sections on Virbac and Air France KLM stocks are not isolated cases. The broader analysis of the CAC next 20, CAC Mid 60 and CAC SMALL indices generates comparable results, as described hereafter.
The chart below spreads the trade execution points for all stocks in the CAC Next 20 (in orange) and the CAC Mid 60 (in blue) based on the time elapse between two consecutive trade executions for each stock, and the percentage variation in price:
Unsurprisingly, given the greater liquidity of the CAC Next 20 stocks, most of the orange execution points are concentrated on the left-hand side of the chart, corresponding to shorter elapse times between consecutive trade executions. However, there is also a noticeable dispersion to the right, with longer elapse times between executions.
The blue executions points – corresponding to the CAC Mid 60 stocks, less liquid – are much more dispersed on the chart on both dimensions: time between two executions and price variation.
Let’s now add, for the same day, the trade executions on the CAC SMALL stocks (another index included in Euronext CAC family index universe comprising stocks which are less liquid than the CAC Mid 60), in green on the next chart:
We observe an even greater dispersion of the green execution points and price variations on the CAC SMALL stocks, with many instances of ‘blank’ times (without execution) exceeding 30 minutes, 60 minutes and even 2 hours.
The two tables below present the average and maximum cumulated time in the trading day where the investor would get outdated information from the post trade CT for the stocks in the three indices:
This means that in our sample trading day of May 16th 2023, the investor watching stocks prices through the post trade CT will get information that are:
more than 2 minutes old during 28% (2h22min) of the day on average for stocks in the CAC Next 20 (up to 59% / 5 hours for some stocks);
more than 5 minutes old during 26% (2h13min) of the day on average for stocks in the CAC Mid 60 (up to 64% / 5h28 min for some stocks) and more than 10 minutes old for 12% (1 hour) of the day (up to 43% / 3h38min for some stocks);
more than 10 minutes old during 62% (5h14min) of the day on average for stocks in the CAC Small (up to 99% for some stocks) and more than 30 minutes old for 44% (3h42min) of the day (up to 95% / 8 hours for some stocks).
During these ‘blank’ periods of time price variations can be considerable (up to 5% for some stocks between two execution points), meaning that investors would have benchmarked on a basis of outdated market prices with an increased risk of trading at wrong levels.
These results – and the number of occurrences – on three of Euronext's most popular indices show the clear limitation of a post-trade CT as a tool to support the investment decisions and all other use cases requiring the analysis of the market liquidity.
During these multiple ‘blank’ periods of time investors would find themselves blind to price movements and related volumes, the only information available being the last execution broadcasted by the CT a few minutes (sometimes tens of minutes) earlier;
As a consequence, a post trade only CT cannot be used as a reliable and sufficient source of market data for investors.
Because the data is unreliable, firms will not purchase it. Hence this CT will not be commercially viable, and will fail.
Antoine Pertriaux, Partner at Adamantia Advisory
 The case for a viable Consolidated Tape on Equity, Adamantia Research: Part I (19/06/2022): https://www.adamantia.paris/post/a-group-of-financial-institutions-assesses-the-viability-of-a-european-consolidated-tape-on-equity and Part II (20/10/2022): https://www.adamantia.paris/post/the-case-for-a-viable-consolidated-tape-on-equity-part-ii