The case for a consolidated tape in Europe continues to strengthen as the potential benefits become evermore apparent to industry participants. Many great developments have been made in the European market so far, yet there is clear scope for more progress, and the highly fragmented trading environment that constitutes securities trading eagerly awaits to reap the benefits.
While enhanced transparency on the price formation process was a key focus of MiFID II’s post-trade transparency reporting obligation, the materialisation has been somewhat hindered due to the lack of a consolidated tape (an electronic system that aggregates real-time executed trade data to be publicly shared with investors).
Unlike single stocks, where there is predominantly one primary listing, the nature of ETF listings on multiple exchanges drives additional trade reporting fragmentation across exchanges and organisations officially approved for reporting (Approved Reporting Mechanisms under MiFID). Consolidation is a natural progression required for ETFs to retain their position as a secure, liquid and efficient investment vehicle.
Easily accessible real-time data from a single source would serve to bolster the competitiveness of the ETF industry by showcasing its unique liquidity and transparency features, where it has previously been mismeasured by reporting of average daily volume instead of the liquidity of the underlying. Heightened visibility across venues will increase confidence across a wider base of investors and could even further the adoption of European-domiciled ETPs in regions such as Asia and Latin America.
Investors in these regions, who possibly elect to use US-domiciled products based on the larger and more transparent US market could switch into the increasingly attractive European market while helping build a more open capital market structure in UCITS ETFs.
A consolidated tape is not a new desire from the industry. European financial markets regulators had hoped the first draft of MiFID II would serve to foster a regulatory environment for the creation of commercial and competing consolidated tape providers.
Concerns surrounding implementation have delayed the process, with the data-intensive nature of collating non-standardised feeds from such a vast number of secondary market trading venues is currently an impediment to making it an appealing commercial proposition, yet one that remains attainable.
To facilitate the process, reactive legislative measures concerning data quality and pricing would be required to run in tandem.
The current scene in Europe runs contrary to that on the other side of the pond where the US benefits from a single currency, regulatory directive and a consolidated tape. Given Europe’s variety of markets, the implementation of a tape will inevitably see larger hurdles than in the US.
Importantly, this should not deter the creation of a tape that has such vast potential to transform the European market, and instead should be utilised as an established example the European Commission can lever to aid structuring a European equivalent.
Market-wide collaboration is necessary between regulators, asset managers, end investors and trading venues to bring us a consolidated tape that will allow us to flaunt the best of the ETF industry and the wider European securities capital markets we know are waiting to be unharnessed.
Keshava Shastryis head of capital markets at DWS, chair of ETF task force at EFAMA and chair of the ETF committee at the Investment Association
This article first appeared in ETF Insider, ETF Stream's new monthly ETF magazine for professional investors in Europe. To access the full issue, click here.
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