UK consolidated tape – London Stock Exchange view

The view from the London Stock Exchange regarding the potential for a UK Consolidated Tape for equities can be summarised by the following four points.

The growth of the UK markets should be a key consideration of any change proposals. Market data improvements should be prioritised against the backdrop of the broader regulatory agenda and consider which measures will most contribute to the goal of making markets function well by increasing the total amount of activity and liquidity for the benefit of all market users and the broader economy. We also need to be cognisant of the differences in UK market structure, compared to the US and Europe, given the unique nature of UK retail activity and the outsized proportion of UK Systematic Internaliser (SI) volumes in large driven by the distortions created by the UK stamp tax regime.

There is an urgent need for an accurate post-trade tape and agreed volume figures. Accuracy of post-trade data would enable the buy side to place larger orders and the sell side to ensure they are able to include the additional available liquidity in volume profiles, moving away from the current venue only calculations and so help meet the growth objective. Transparency of volumes is essential for the market to make investment decisions. We recommend that the FCA perform a review of post-trade reporting accuracy and take action to ensure the quality of this important data.

Feedback from the market is that having agreed volume numbers both in terms of addressable and total liquidity would be most effective in improving secondary market trading liquidity. We would not want the FCA to delay the roll out of a post-trade tape while there is a necessary debate around the value of and risks associated with a pre-trade tape.

The quantity and quality of secondary market liquidity is now central to the risk and investment decisions made by investors and in turn influences the international listings debate. The ability to inform current issuers about total activity in their company and prospective issuers about total liquidity in their peer companies – whether on or off central venues including transparent venue attribution, whether through a cash equity transaction or via CFD (or delta 1 swap) – is integral to the attractiveness of London as a destination for IPOs and secondary trading.

A robust use case for a real time pre-trade tape is lacking. With UK lit continuous volumes at all-time lows, further quantitative metrics need to be analysed to consider the impact on price formation. If price formation breaks down, it is to the detriment of all mechanisms that use lit order book liquidity as a reference price. We support the work of the FCA to consider what further quantitative metrics need to be analysed in order to consider the impact of a pre-trade CT on price formation.

Pre-trade market data is used by the trading community for the placement of orders on Central Limit Order books (CLOBs) or as a reference price for trades executed away from these venues. For electronic trading, the market should consider the impact of latency and consider the risks that may be created pertaining to certainty and quality of execution.

From our study “Why latency matters” contained in a later section of this paper we assess the impact of latency by analysing data for the full year of 2023 for securities in the FTSE 100 assuming a delay of 10 milliseconds. We find this small delay would cause the price to be incorrect by an average of 14% of a spread and the volume displayed on the tape to be incorrect by an average of 37%. In terms of potential execution outcome, our case study shows this translates to slippage of 14% of an average spread in terms of weighted mid-point. This demonstrates how using a delayed market data feed for trading would result in uncertainty in execution outcome and so complicates the ability to demonstrate best execution.

We believe that an accurate post-trade tape could provide the price, volume and venue information needed for a human trader to get a more complete view of the market given the inclusion of trades executed away from CLOBs. Members of the London Stock Exchange have indicated that they will continue to trade on direct feeds as they value precision of execution. Others using pre-trade market data for automated trading should consider the value of a pre-trade CT given the impact on execution quality and certainty. If the sell side stay on direct feeds but the buy side move to stale consolidated feeds for automated order placement, we believe this may lead to a mismatch in expected execution outcomes.

We do appreciate the interest in a consolidated pre-trade view of the state of the order book for TCA and historical order placement analysis. However, this information is not often used on a real time, trade by trade basis to interrupt the execution but is aggregated post-trade to ensure there is a large enough data set with some statistical significance to act upon. There are a number of vendors that already provide such data.

A Consolidated Tape (CT) cannot be both operationally robust and low cost. Producing a low latency, operationally resilient pre-trade feed simply cannot be achieved on a low-cost basis without compromising quality and therefore its efficacy and reliability. Whilst we agree that there is a need for better market transparency, we do not see how a pre-trade CT can act as a tradable back-up in case of a lit market outage and not be subject to the same operational risk measures as venues. The view that a low latency tradable consolidated feed is expensive is evidenced by the expectation that the cost of the newly proposed US Securities Information Processor (SIP) (which costs $25–30m per annum to run) exceeds the aggregated cost of paying for all direct feeds from the US exchanges, and the Oliver Wyman report has estimated of €98m for the setup of a real time EU pre-trade feed and €38m per annum of running costs.