Out of Many, One: The What, Why and How of Consolidated Tape

The more things change, the more they stay the same. While equity markets around the world continue to evolve rapidly, market data remains their lifeblood, with its importance only growing.  To serve the needs of retail investors — a group that is quickly growing in terms of both raw numbers and market influence — industry firms must work together to provide fair and efficient access to critical core market data. At a minimum, core market data should serve the needs of investors by providing price transparency and accountability, giving investors a benchmark to assess execution quality and regulatory compliance.

Historically, consolidated tapes have been an important way that regulators seek to provide core market data. In the U.S., the SIPs (the Consolidated Tape Association and Unlisted Trading Privileges) disseminate consolidated real-time trade and quote information. While there are ongoing efforts — which MayStreet strongly supports — to modernize the system put in place in the mid-1970s, the SIPs continue to be a key part of the U.S. equity market landscape. In contrast, the EU does not have such a system in place, and debates over whether and how one should be implemented continue to make headlines.

We thought it would be useful to review some of the basics of consolidated tapes: what they should encompass, how market participants can benefit and how they can be structured to maximize fairness and transparency.

Getting to the Core

Let’s start with the basics. As we discussed in our recent response to the IOSCO consultation paper on secondary equity markets, “core” market data means different things to different market participants. While everyone who trades needs market data, different types of market participants with various roles in the trading process use that data in different ways. 

Retail investors need data to make investment decisions, choose service providers and assess portfolio performance.

Institutional investors have many more considerations: they need data for portfolio management, sales, trading, pre-trade risk management, post-trade processing, execution analysis, best-execution assurance, compliance and so on. Asset managers’ sell-side counterparts also need data for these functions, as well as ones relating to trade execution, such as algorithm development and smart order routing. Market centers, meanwhile, require data to attract liquidity and demonstrate execution quality and compliance, while technology vendors, regulators, researchers and others have their own unique needs.

Understanding all these use cases is necessary for defining the elements of core market data. Core market data should be designed to serve as many entities as possible while prioritizing the specific needs of retail investors and the buy-side and sell-side intermediaries that serve retail investors. These investors can use consolidated tapes for price transparency and accountability benchmarking, two prerequisites for investor protection and efficient markets.

At a minimum, core market data should encompass real-time trade data including symbol name (standardized across venues), price, quantity/size, execution venue, timestamp and trade conditions. Ideally, it should also provide pre-trade transparency around the best bid and offer and the quantity/size of the order, through both per-venue figures and consolidated metrics.

Under the Hood

Now that we understand what should comprise core market data, let’s explore some of the attributes that this data must have: coverage, quality, timeliness and accessibility. All four are necessary for a minimum viable product to meet the needs of retail investors.

Core market data should have enough coverage to provide transparency into essential trading functions such as price discovery and benchmarking. In the U.S., that currently means all equity exchange operators send their trades and quotes to a central consolidator, which produces data feeds for global distribution. Going forward, in a competing consolidator model, these feeds will continue to rely on a consistent and transparent data model with well-enforced quality requirements. In any core market data offering, a consistent, quality data model must apply to all fields and values, including symbology.

Core data must also be accessible in a timely manner. Latency requirements should depend on use case – real-time, intra-day and historical data all have value – but overall, the data should be available to consolidated tapes at the same time as proprietary exchange feeds. In addition, if latency is sufficiently low, use cases can extend to certain types of trading, including matching of midpoint orders.

Finally, there is accessibility. Depending on the use case, data offerings may require implementation and ongoing effort by end users, such as purchasing of hardware, software development and ongoing maintenance of both. These requirements should be kept to a minimum for buy- and sell-side firms, and should not exist at all for retail investors.

Access Is Everything

Of course, that’s all easier said than done. Ensuring fair, equitable and timely access to market data – the standard discussed in the IOSCO report – is a complex process requiring a holistic view of how data is distributed today and where retail investors may be underserved.

This includes considering the data’s various uses, audiences, implementation requirements and the ongoing costs of accessing it. It is important to note that the costs of data access go beyond purchasing the content and extend to connectivity, colocation, software and hardware maintenance and more. The common need to normalize and consolidate data is another relevant consideration. In these regards, retail investors and the intermediaries that serve them can derive a direct benefit from access to a consolidated tape.

One major obstacle to solving this problem is the complexity of market data pricing and administration. Separate charges and pricing tiers for connectivity, data usage, distribution type, user type and so on are an extreme challenge for users to reconcile, adding significant costs to ensure compliance with market data policies and reporting requirements. Simplicity and transparency with respect to these costs would make it easier to ensure fair and equitable access to market data.

Conclusion

For all these reasons – the fundamental need for market data and the common use cases retail investors have with respect to accessing this data efficiently and affordably – consolidated tapes can play a crucial role in any market structure. A comprehensive, high-quality, timely and consistent view of the markets streamlines numerous processes. Retail investors and the institutional investors who serve them stand to benefit most, but compliance professionals, regulators and sell-side execution quality analysts can also use these feeds as a benchmark for compliance and transaction quality analysis. Providing this data gets at the heart of what it means to protect investors and promote efficiency in the markets, concepts that figure prominently into the mission statements of regulators globally.

It’s important to note that the implementation of a consolidated tape does not mean the end of proprietary exchange data products, as they offer a level of latency and order book depth that goes beyond core market data. Furthermore, market data is unique to each venue – it is not interchangeable. For firms requiring this information, exchange products will continue to play an important role in their processes as they seek to differentiate their offerings and serve their clients.

But acknowledging the need for consolidated feeds is not enough – they must be implemented in a way that promotes transparency and ease of use. Organizations committing capital to develop these offerings must be aware of the fees, specifications and administrative requirements. The rollout process must be phased to ensure incremental progress and development. In addition, consolidated tapes need a common data model – the data must mean the same thing across all types of venues to allow for comparison. Compliance can be promoted through the use of required fields, such as mandatory disclosures of data at the provider level.

The role and implementation of consolidated tape offerings is not without controversy. Given the myriad of stakeholders and the economics of market data, it is difficult to achieve consensus on topics relating to market data, but most agree that a comprehensive and consistent view of basic trade and quote information has the potential to empower retail investors and improve investor confidence. This is a worthy goal that we should all be able to rally around.

Manisha Kimmel, Chief Policy Officer

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