Opening Cross: Will Cost Concerns Neuter Future Litters of CATs?

So the new fees proposed by US consolidated tape operators the Consolidated Tape Association and the UTP Plan are unlikely to receive a warm welcome from end-user firms and securities trade associations, which have already forced the tapes to rethink fee increases originally scheduled to take effect in 2013 and at the start of this year. The new fee proposals—rather than raising prices across the board—actually reduce some headline charges, and instead raise the price of per-query data access and introduce new fees for non-display data usage.

In muted praise of the new proposals, a bank source tells IMD’s Faye Kilburn, “Though this is a better choice, we never like fee increases. We are not endorsing it; we just didn’t like the other one more.”

Meanwhile, the Securities and Exchange Commission-mandated Consolidated Audit Trail, created in response to the need for a more granular audit trail of US trading activity following the May 6, 2010 “Flash Crash,” is also facing some difficult choices. In a story in the November edition of Waters magazine, Dan DeFrancesco outlines the “rocky road” that led to the plan submitted to the SEC by US self-regulatory organizations on Sept. 30, and outlines the propositions being offered by each of the six companies and consortiums bidding to provide the CAT.

At least the US has consolidated tapes. In Europe, no official tape of record exists. The Markets in Financial Instruments Directive allowed exchanges and multilateral trading facilities to trade securities listed on other European markets, creating consolidated pan-European trading, but did not mandate a pan-European consolidated tape of data to support that trading.

Since the introduction of MiFID in 2007, no tape has emerged, while market participants have continued to argue over who will provide such a tape and how much it will cost. In fact, despite the cost-saving potential of a consolidated tape, cost has been such an issue that The Coba Project—a think-tank set up specifically to design an industry-wide tape—disbanded after failing to get sufficient buy-in and financial support from participants. And only now with the MiFID 2 review, has the European Securities and Markets Authority mandated an industry-led tape, scheduled to take effect in 2017.

It’s hardly surprising that participants would be wary of the impact on their pocketbook. According to DeFrancesco’s story, the average cost of building the CAT—as estimated by the bidders—will be $53 million, plus a further $255.6 million to run and maintain for five years.

But while vendors in the US are falling over themselves for a slice of that pie, European players are being more cautious. However, BATS Chi-X Europe is taking a lead on the subject by implementing the Market Model Typology trade reporting tag standard for over-the-counter trades reported via its BXTR reporting platform. A BATS spokesperson says the 20 participating firms reporting to BXTR are all now using MMT “to some degree,” preparing them for such future time as when BATS may mandate its use, or when the standard becomes mandated under MiFID to support the introduction of a European consolidated tape, which isn’t expected until 2017—10 years after MiFID’s introduction.

But the ultimate benefits of tapes and audit trails go far beyond supporting trade routing and best execution. As a spokesperson for the CAT Consortium tells Waters’ DeFrancesco, “This will facilitate more comprehensive monitoring of the financial markets and allow the SEC to carry out market reconstruction as necessary and ad hoc market analysis…. The biggest challenge is getting a sophisticated and complex data system of this size up and running, with multiple users and contributors, in a very short time.”

I’m sure this isn’t lost on their transatlantic counterparts pondering a pan-European consolidated tape.