The FCA proposal copied the wrong homework from a weak neighbour. The faulted ESMA equity RTS confused the concept between ‘single source of truth’ and ‘single source of access’ repeating the fatal flaw of the US Consolidated Audit Trail. A wide latency tolerance mussed up data that one cannot roll the data forward and backward to see which trade message came in first, second, third, or a hundred thousandth. In turn, it is not suitable for BestEx, surveillance, or regulatory market monitoring purposes. Worst, it affects the EBBO to be stale with a widespread, broadcasting that there is no opportunity in Europe. Quality without the appropriate benchmarks is NOT quality.
Unlike the Bond Tape where the key issue is about reference data, equity CT is about latency, bandwidth, and capacity to handle peak volume. Neglecting how self-aggregators and ultra / low-latency vendors can consolidate data in justifying their costs is one of the big mistakes in the UK and EU assumptions. US experience has shown low-latency subscribers to SIPs yield 30+% savings from subscribing only to 7 of the 11 top proprietary feeds.
Market data vendors, particularly those who provide ultra or low-latency feeds, as well as transaction cost analysers, smart order routers, outsourced execution service providers profit from market fragmentation. It is more lucrative to serve selected investment firms that paid them a premium than becoming a CTP in risking their relationships with Exchange Groups and Wholesalers. Unless there is a higher incentive to make it worthwhile for these ultra or low-latency market data vendors or infrastructure providers to compensate their opportunity loss, their services would remain a complimentary product or value-added service instead of competing with Exchanges’ proprietary products.
Scenario 4 (top 5 pre-trade bids and offers from lit venues and SIs, distributed with a latency of 20-40 milliseconds) is the BEST option among the four, amid we have reservations about SIs’ data. Investment firms are adjusting to the US Market Data Infrastructure Rules and Transparency of Better Priced Orders requirements. Most system upgrades costs would already be covered and absorbed by their US branch or would be shared globally. ‘Round lot’ tiers offer protected, actionable liquidity rather than ‘phantom.’ Putting this users’ perspective in mind help UK strengthening the equity CT design and development.
Contrasting with an evidence-based approach, there is no good reason for the ‘survey’ to include Scenario 3 (3 pre-trade bids and offers from lit UK venues, distributed with a latency of 40-100 milliseconds) other than using it as to create a ‘Decoy Effect.’ The cost benefit analysis omitted to account for the benefits of non-display low latency subscribers subsidising the subscribers of display feed for equity CT, it confused the UK public and swaying or causing cognitive bias towards Scenario 2 (top-of-book from lit UK venues, distributed with a latency of 100-200 milliseconds).
Bringing the sources of the problem to administer/ enforce an inequitable scheme. It will exacerbate initial bias and gaps between the ‘haves’ and ‘have-nots.’ The average market data price across the UK and EU would further increase by at least 5 to 10%. Market participants would lose faith in the integrity of UK and EU markets. The only interested parties to seek trading opportunities in the UK and EU would be those who can exploit and segment order flow away (i.e. toxics and FAIL to achieve regulatory goals). Please do NOT forget these acknowledged concerns: ‘onerous administrative obligations on data users … excessive fees; increase of fees through penalties; and overly burdensome audits.’ Without a novel approach from new entrance or getting buy-in from at least one of the existing ultra or low-latency feed providers to shake up the dynamics, we are doubtful that the FCA tender process would yield any fruitful result.
Equity CT must be a product of reasonable compromise, if not a close substitute, to Trading Venues’ proprietary products or APAs’ value-added services to achieve the regulatory goal of ‘affect competitive pressures for existing seller of market data, resulting in cheaper, higher quality and more accessible data for its users.’ Picking the wrong choice means a ‘sunk cost’ and time loss for the UK. Not only will it be a ‘loss opportunity,’ but prolonging the suffering of unjust situations indeed reinforces ‘initial bias’ and rent seeking behaviours, making it harder or impossible to rectify the mistake afterward. The FCA current proposal defeats the goal of ‘levelling the playing field.’ It fails to meet UK’s regulatory objectives of ‘enhancing price discovery and market competitiveness.’ It is worse than the Jukebox era in the 1970s and we do NOT believe any ‘governance provisions’ would help. Its mindset and ambition are constrained by a focus subordinate to the EU, preventing the UK from competing on a truly global scale.
How sad, but it can be rectified if there is a will. The UK now could lead the world by mandating proprietary feeds and CT market data to be available SECURELY in SYNCHRONIZED time per our suggested NEW Scenario 5. By mandating the use of Time-Lock Encryption for both equity CT and proprietary feeds, it eliminates the problem of where the CT data centre is located (cost saving by locating CT away from the most expensive prime zone and is fair). By improving fairness and market integrity, our approach would significantly increase UK competitiveness, attract investments and deepen natural liquidity to grow the overall pie in benefiting all constituents. It is ten times better than the quantifiable net benefits stated under the FCA’s 4 scenarios.
UK is now at a juncture to choose between following EU delusional/ slogan-based diplomacy or taking concrete actions in curbing Exchanges from optimally restricted access to price information. It may be time for the Competition and Markets Authority to invoke Antitrust laws to investigate against alleged monopoly or oligopolies, particularly when firms engage in collusive behaviour, price-fixing, or abuse a joint dominant position.
We have been informative and the US is transparent without withholding any secret ingredients – all cited information are publicly available. The UK can freely replicate the US SEC Market Data Infrastructure Rules and Transparency of Better Priced Orders requirements as appropriate or take a leap of faith in considering our novel approach.
Download our 38-page FCA comment letter for responses to individual questions.
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By Kelvin To, Founder and President of Data Boiler Technologies Data Boiler is a Type C organization member of the European Commission’s Data Expert Group. Between my patented inventions in signal processing, analytics, machine learning, etc. and the wealth of experience of my partner, Peter Martyn, we are about Market Reform, Governance, Risk, Compliance, and FinTech Innovations to create viable paths toward sustainable economic growth. |
