Across Europe, stock exchanges’ greatest fears may be coming true as an ambitious plan for a ticker tape gathers momentum in Brussels.
Stock exchanges are fiercely resisting calls for a “consolidated tape” that would create a price feed for stock trades across the EU’s disparate trading venues. They fear the tape could eat into lucrative revenues from trading data — possibly even pushing smaller exchanges out of business.
This is an existential question for exchanges, both large and small, because they make much of their money from selling data.
Exchanges say they have a better idea — a “post-trade” shares tape where information on prices is published with a 15-minute delay — as they lobby hard against more extensive versions.
Yet those arguments may now be falling short. Both EU capitals and now the leading MEP working on the legislation are discussing a real-time tape with at least some pre-trade information on bids and offers before a trade takes place. Polish MEP Danuta Hübner says the tape would only be of value to investors if it includes pre-trade data, according to an explanatory note seen by POLITICO recently.
Accordingly, “it is essential that the equity tape contains real-time, pre-trade information, necessary to inform investors’ trading decisions,” says the note, which provides an overview of Hübner’s draft report.
Exchanges and other trading venues face mandatory submissions to the tape in exchange for a slice of the revenues generated from subscriptions from investors.
Hübner’s plans would still offer some relief to smaller stock exchanges, which would be exempt from those submissions under certain conditions. However, they could also choose to opt in and gain a larger proportion of the revenues.
Meanwhile, EU capitals are reviewing a proposal put forward by the French Council presidency in June that would also include voluntary pre-trade contributions.
The pre-trade inclusion is a major blow for the larger exchanges, such as Deutsche Börse and Euronext, where that data forms a bigger part of their revenues. As they see it, a consolidated tape that hoovers up pre-trade data would dent their business models.
It also goes further than the European Commission’s initial proposals for a shares tape with post-trade information as close to real-time as possible amid concerns there may not be enough commercial demand.
“We will continue to advocate for a package of market structure measures which bolster transparency, alongside a well-calibrated [tape],” said a spokesperson for the Federation of European Securities Exchanges (FESE), the leading industry body. “But not one that publishes pre-trade data, creating an illusory view of the market, ripe for arbitrage by major institutional players to the detriment of retail investors.”
Political minefield
The fight over the tape has turned into one of the thorniest issues in financial services policy. The legislation has become a political minefield in Brussels, as national interests combine forces with competing industry lobbies to create political blocks.
Germany and a large number of countries in Central and Eastern Europe support the exchanges lobby due to fears about the impact of the tape on their domestic exchanges, which can be crucially important to local economies.
On the other side are countries like the Netherlands and Ireland, which support an ambitious ticker tape on grounds it’ll boost transparency across disparate markets and help the EU achieve one of its major political goals: a capital markets union where investment flows freely across borders.
But it’s not as simple as being for and against. The debate is also complicated by another bitter fight between exchanges and investment banks over how much trading should take place on “lit” or “dark” markets. (“Lit” refers to trading done in the open and on exchanges, while “dark” trades are done confidentially, in private “dark pools” or facilitated by investment banks.)
Exchanges generally oppose the growth in dark trading on grounds that it should only be available for large block trades that could move the market. The industry lobby wants the EU to force some of the trading that investment banks conduct internally with clients back to public markets.
“While we agree with the need to address liquidity fragmentation, the tape is not the solution,” said the FESE spokesman. “Only a proper market structure can address fragmentation. In fact, the issue is the extent to which banks are able to internalise trading on their own books.”
Investment banks, meanwhile, argue the EU needs a variety of trading venues, and warn against imposing “undue restrictions” that could damage liquidity and limit investors’ choices.
“Banks, as market makers, are an essential part of this ecosystem, committing their balance sheets to provide liquidity to financial markets,” said Adam Farkas, chief executive at the Association for Financial Markets in Europe (AFME). “This intermediation is vital to help support market depth and liquidity throughout changing market conditions.”
Hübner tries to strike a balance in her draft report. In a concession to exchanges, she proposes creating more transparency before trades take place by increasing the threshold for the use of price waivers and limiting investment banks’ ability to quote below that level for their own internal trading systems. But she would also scrap existing caps on dark trading, which she describes as of “limited utility” — a move favored by investment banks.
Eking out some wins
Hübner’s compromise on dark trading isn’t the only example where exchanges have been able to hold some ground. They also may come out ahead in a related fight over “payment for order flow” (PFOF) — an innovation that allows online apps to offer retail investors a commission-free service while earning money by directing their share orders to select brokers.
Exchanges have been backing a Commission proposal to ban PFOF altogether, which may again move trades away from public markets. Brussels had pitched the ban within its capital markets reforms due to concerns over conflicts of interest after the practice came under scrutiny during the GameStop trading frenzy in the U.S.
Among EU capitals, Germany — home to many of the fintech platforms using PFOF — has been unyielding in its opposition to a ban. But it’s now finding itself increasingly isolated as other countries back the ban.
The French presidency initially tried to keep everyone happy by marrying the continued use of PFOF with a pre-trade tape to test the value the model provides for investors, but there was opposition from both sides and the proposal quickly died.
For her part, Hübner is keeping the ban on the table. So while the exchanges stare down the momentum behind a more ambitious tape, they won’t lose out completely if more trading is hauled back into the light.
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