Up-And-Running Of Consolidated Tape Versus Market Structure Improvement

The FCA concluded its comment period for Policy Statement for the framework for UK consolidated tape (CT) on the 9th of February 2024. We think there will need to be “give and take” in the short term to get the CT up-and-running the soonest and will need to remain flexible for right-course policy actions in the long term for market structure improvements.

Contexts of the matter are: (a) priorities where the UK Chancellor committed at the Edinburgh Reforms that the Treasury and the FCA would have a legislative and regulatory regime for a UK CT in place by 2024; (b) friendly competition with the EU where the European Parliament recently voted in favour of MiFID revision by mandating the creation of "consolidated tapes" or single real-time snapshots of bond prices by mid-2025; and (c) maintain the momentum in post-COVID economic recovery; not to lose that momentum in advancing the development of CT; and get even more momentum out of improving the overall bond liquidity. 

CT is NOT funded by public money, nor is it free from competition in the 5-year term. Artificially crafting a 15% to 20% profit margin and mandating a certain revenue sharing scheme to lure the emergence of a CT Provider is not equivalent to a guarantee of full cost recovery. A CT Provider is expected to act as a “loss leader” to bear the risk of building the CT first and hope subscribers will come. Hence, the CT is NOT a public utility. 

A CT Provider has a weak proposition – (i) fixed obligations, (ii) price setting restrictions, (iii) uncertain demand, plus (iv) extra burdens under the FCA required conditions. The chances are slim to find a potential CT Provider willing to be a CT pure play, if lacking the ability to offer value-added services (VAS). In our opinion, the CT must be a product of reasonable compromise, if not a close substitute, to Trading Venues’ (TVs) Proprietary Products (PPs) or Approved Publication Arrangements’ (APAs) VAS and be widely accessible at price within reach to achieve the second goal of “Affect competitive pressures for existing sellers of market data, resulting in cheaper, higher quality and more accessible data for its users.” 

If the Have-Nots are willing to commit their limited resources to compete with the Haves, they should be given affordable and comparable choices. The relative availability and price difference of mass market products (e.g. CT) versus TVs’ PPs and APA’s VAS is key. To promote the emergence of a CT Provider, permitting VAS is necessary. We concur with CP23/33 - 5.17 that it is “necessary to set out a mechanism for appointing a CT Provider such that competition for this market replicates, as far as possible, the theoretical benefits we would expect from competition in the market, notably in relation to price, quality of service and innovation.” The separate legal entity structure is applaudable for a clear cut between CT pure play and their VAS. It helps avoid cross-subsidization and is easier to compare bids for CT from different potential vendors. Yet, this does not change the fact that TVs and APAs have the upper hand in controlling data supply. 

Learning from the US Market Data Infrastructure Rule, the US Court of Appeals struck down the SEC’s CT-Plan on July 5, 2022. Establishing a consultative committee that is composed of data providers and users would NOT be the right governance approach. The suggested formalities lack substance to address the divergence between private rights and social costs problem. To ensure accountability, appropriate use of incentives and consequences for wrongdoing is necessary. TVs and APAs should bear royalty payments and earn appropriate subscription fees to cover their costs. The LACK OF STANDARDS across different market centres’ rebate and incentive systems is the CORE of all issues.

Using the prevailing rates in the music industry as a hypothetical case study and following the logic of the Copyright Licensing Mechanism, TVs or APAs should earn at least 5% (and pass through the remaining 95% of the royalty downstream) in pushing data upstream to the next aggregator or CT Provider, so long as they pay the appropriate royalty downstream where they sourced their “contents.” NOTE: broker-dealers are the “content creators” in our opinion. Exchanges, Multilateral Trading Facilities, Organised Trading Facilities, Systemic Internalisers, Single Dealer Platforms, and APAs should be considered as different “streaming platforms.”

This Copyright Licensing Mechanism is applicable to respective CTs for Equities, Fixed Income, and Derivatives. If TVs and/or APAs did not pay their dues and wanted to earn from CT Provider on the other end, in essence, they are rent seeking like the Jukebox era. By putting a value on quotes and trades composition, proper considerations will be given to eliminate conflicts of interest. It will also ensure the efficiency in deployment of resources. Market forces will determine the optimal fees by the different TVs, APAs and CT Providers. 

Do not get us wrong, we are NOT trying to recommend regulatory price control. We strongly recommend policy makers around the world to consider a 4-Part test – (1) willing seller willing buyer standard; (2) same parties’ test; (3) “effective competition” test; and (4) same rights test, which taken directly from the music industry's copyright laws for objective rate setting. With regards to mechanism for a CT Provider making cost recovery payments and reasonable returns on investing to a CT Provider, all three mentioned options suggested in CP23/15 are undesirable. 

Option 1 suggests “A fixed level of payment that shares the cost of connection between the CT Provider (and, potentially, data users via higher CT license prices), the payment of which is linked to a data provider meeting certain requirements in terms of the quality of its connection to the CT Provider and the quality of the data it gives.” Putting data in-motion from one place to another incurs cost. If it offers no commercial value or serves no public interest, it should be minimized in all circumstances. It is outside of TVs and APAs regular duty to connect with a CT Provider, so charging for recovery of connectivity sounds reasonable. Yet, if TVs and APAs may not be paying their royalty dues to content creators in the first place, then their rent seeking on market data and connectivity is not justified. Asking CT Provider to split half of the connectivity cost with TVs and APAs is indeed a compromise.

Option 2 suggests “Payments are based on invoices from the data providers of their direct one-off costs of connection, with the payment being linked to a data provider meeting certain requirements in terms of the quality of its connection to the CTP and the quality of the data it gives.” A cost-plus approach would not work. There will be endless arguments, as illustrated by the different perspectives from IEX, NASDAQ, and others. 

Option 3 suggests “Payments are based on a percentage of the revenues a CTP earns in its first year of operation, with the payment being linked to a data provider meeting certain requirements in terms of the quality of its connection to the CT Provider and the quality of the data it gives.” Why should the CT Provider incentivize TVs and APAs to provide high quality data, when it is the TVs’ and the APAs’ existing duty under the FCA’s oversight to ensure proper quality? If coding for “deferral” is above and beyond TVs’ and APAs’ current duty, then they should earn the equivalent compensation rather than using an incentive system to promote quality. If TVs and APAs are unwilling to accept a fair compensation to manage the “deferrals,” then consider cutting out the middlemen (APAs) and let the CT Provider use its economy of scale to consistently apply deferrals.

It is understandable that people wanted to “check the box” to get a post-trade Bond CT up-and-running the soonest. Yet, the pursuit of a pre-trade tape and other market structure improvements should continue. See our latest comment letter at: https://www.databoiler.com/index_htm_files/DataBoiler FCA 20240209 CP2333.pdf