European policymakers are renewing their demand for real-time databases of stock and bond trading information, in a bid to rejuvenate the region’s capital markets.
Brussels sees these projects as key to deepening and unifying the EU’s fragmented financial markets, making them more attractive and safer for international and retail investors.
Europe is currently a patchwork of over 470 exchanges and trading venues, giving investors plenty of choice but little ability to track trading activity and make comparisons.
To overcome this problem, the EU aims to establish live databases – known as the “consolidated tape” – which aggregate basic business information from competing sites in the bloc.
Previous efforts to create a pan-European capital market, comparable to the United States, have repeatedly failed when they clashed with national and commercial interests.
However, in recent weeks France – while holding the European Council presidency – has been trying to find a consensus between countries that could speed up reforms to European markets, known as the Mifir legislation.
For some, it can’t happen too soon. Authorities have estimated that the total cost to investors of not having an accurate view of stock prices on the continent is 10.6 billion euros. Efama, a trade group representing some of Europe’s biggest fund managers including M&G, Allianz and Fidelity, warned global investors would go elsewhere rather than trade in Europe.
“We are encouraged by the recent momentum around the European Commission’s proposal for the reform of Mifir, which represents a significant step forward in bringing a consolidated band to European capital markets,” said Stephen Fisher. , managing director of global public policy at fund manager BlackRock.
“We believe that a consolidated band for stocks, bonds and exchange-traded funds, built in the right way, would increase transparency, protect investors and improve the competitiveness of European markets for the benefit of European end investors.”
With the EU already stung by the loss of the City of London to Brexit, the European Commission – the bloc’s executive body – has made establishing a consolidated strip a central part of its market reforms .
The tape would record vital data, such as the size and price of a transaction. It would have separate components for stocks, bonds and ETFs, tailored to the characteristics of each market.
The Commission wants a near real-time band for the stock market, but is likely to accept a slower system for fixed income, where transactions are fewer and often negotiated privately.
Operations would be handled by private technology companies overseen by the European Securities and Markets Authority, the pan-European regulator.
These means of recording trading data have been a common feature of US financial markets for decades. But EU capital markets, when measured against gross domestic product, are half the size of those in the UK, which are just over half those in the US. United, according to London think tank New Financial.
And, although live European databases were mandated by the EU’s 2018 Mifid rules, private companies have made little progress in turning them into reality.
Consolidated band projects were stalled because private companies were unwilling to share data cheaply, or data delivery was too slow or not standardized.
Potential band operators therefore concluded that it was impossible for them to make a profit and abandoned their plans. But, undeterred by past experience, Brussels wants plans to be at least underway by the next European Parliament election – the first since Brexit – in 2024.
The need for a consolidated band is arguably even more pressing in the fixed income market, due to its opaque private transactions.
In April, a study by investment management software group Finbourne Technology for the Association of Financial Markets in Europe (AFME), a banking lobby group, suggested that this problem could be partly solved if transactions were released to tape in near real time.
With the majority of daily corporate bond trades below €500,000, the AFME study found that near-instantaneous reporting would significantly improve transparency in the fixed income market. A tape would increase the proportion of transactions currently reported in real time from 8% to almost 70%.
According to AFME, the reporting of larger and more illiquid transactions should be deferred, as the current Mifir proposals would effectively disclose a bank’s private activity to the market. This would “force [banks and brokers] to release their books to the market before unwinding or hedging their positions,” said Adam Farkas, AFME’s Managing Director.
AFME argues that its deferral request for certain types of fixed income transactions is not particularly onerous. Already, the Mifir proposals allow long deferrals for sovereign bond transactions.
Some progress is underway. The Dutch Financial Markets Authority has agreed high-level technical principles for a consolidated corporate bond band with several of the biggest players in the industry. These include Bloomberg, Flow Traders, Tradeweb and Efama.
A band-for-equity deal may present a bigger problem, however.
The Commission wants all trading venues operating in Europe to provide standardized trading information on a tape, including that of private marketplaces operated by banks and market makers.
But any revenue generated by a band would only be shared among regulated exchanges. None would go to the other mandated marketplaces to provide their data.
Efama says this amounts to a subsidy to stock exchanges: “The raison d’être of the strip is to support the functioning of the capital market in the EU and thereby improve the performance of issuers and investors”, notes she. “It should not be designed to subsidize the operating models of intermediaries like major exchanges.”
The cost of creating and running a consolidated band is also disputed. Adamantia, a Paris-based business management consultancy, estimated the cost of building up an equity band at €17 million, with annual operating costs of €16 million. to run. This could make it an unaffordable project for small businesses.
According to Efama, regulators should cap the price of a band at “a reasonable commercial basis” to encourage users. But, if no commercial company emerges, Esma, the pan-European regulator, is expected to run the tapes.
That leaves a question mark over when a consolidated band might emerge. Brussels has a busy legislative agenda and the updated market rules must compete with other financial services legislation governing insurance and sustainability.
Nevertheless, few lobbyists in Brussels doubt that a consolidated band will arrive. The EU’s political will to introduce them is too strong, they say. Even so, every detail of their construction will be hotly contested before regulators. Whatever the EU accepts, it risks disappointing part of the market.