On 29 June, the European Council and European parliament reached a milestone agreement to implement a consolidated tape and limit the use of payment for order flow (PFOF).
The decision followed extensive debate relating to both topics, which have proved to be the most divisive during Trilogue discussions thanks to opposing viewpoints favoured by the European Council and Parliament.
Following last week’s agreement, a real-time EU-level consolidated tape for a range of assets traded in the EU will be established, including key information such as the price of instruments and the volume and time of transactions. Data from all trading platforms will be included in the consolidated tape.
However, while many market participants agree the compromise is a long-awaited breath of fresh air, others disagree. Among them is the Association of Financial Markets in Europe (AFME) that has noted that some aspects of the deal are likely to lead to suboptimal outcomes due to the lack of clarity on the inclusion of pre-trade data.
While last week’s compromise made no mention of the inclusion of pre-trade data, several sources told The TRADE that the agreement includes an anonymous EBBO with no attribution to venues, as well as real-time fully attributed post-trade data. However, this is unconfirmed.
“AFME in particular regrets that the determination to create an ambitious, real-time equity consolidated tape with sufficient pre-trade information has been lost through the negotiations,” said Adam Farkas, chief executive of AFME.
“This was an opportunity to create a single, worldwide window to the equity market in the European Union and to reduce the costs of market data, which has been a long-standing issue in assessing Europe’s competitiveness.”
Farkas labelled the decision as a “missed opportunity” for developing the Capital Markets Union, while also stating that the co-legislators failed to appreciate the fast-evolving nature of financial markets in Europe and globally in the detailed rules regulating fixed income markets in level 1 legislation.
Elsewhere, relating to fixed income, AFME stated that a lack of evidence corroborating the changes to post-trade transparency exists – in particular, that maximum deferral periods are codified in the Level 1 framework. The association noted that a greater use of delegation to ESMA for the purpose of evidence-based calibration would have been more appropriate.
The industry association also highlighted concerns that the inflexible nature of the deferral framework in level 1 will hinder the EU from having the agility to respond to evolving regulatory changes in third country jurisdictions or to adapt under stressed conditions.
Alongside the tape compromise, regulators also introduced a general pan on payment for order flow (PFOF), with the possibility for a member state where PFOF is currently allowed to offer firms in its jurisdiction an exemption – which will eventually be phased out by 30 June 2026. A decision that has been largely welcomed by participants.
“I’ve long argued that a PFOF ban is the correct course of action. PFOF is able to finance the illusion of free trading by turning the retail investor into the product,” Daniel Schlaepfer, president and chief executive of Select Vantage Inc., told The TRADE.
“All eyes now turn to the SEC, whose new market structure reforms seek to mitigate the negative externalities of PFOF through a set of complex auction rules instead of simply following first principles and banning the practice outright. Perhaps the EU’s decision will give them pause for thought.”