EUROPEAN COMMISSION Brussels, 25.11.2021 SWD(2021) 346 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the Proposal for a Regulation of the European Parliament and of the Council

amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders Proposal for a Directive of the European Parliament and of the Council



amending Directive 2014/65/EU on markets in financial instruments {COM(2021) 726 final}

{COM(2021) 727 final}

{SEC(2021) 573 final}

{SWD(2021) 347 final}



Table of contents 1.Introduction: Political and Legal Context 2.Problem definition 2.1.Main stakeholder views 2.2.What are the problems? 2.3.What are the problem drivers? 2.4.How will the problem evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.Options to achieve specific objectives 1 and 2 5.3.Options to achieve specific objectives 3 and 4 5.4.Options discarded at an early stage 6.What are the impacts of the policy options? 6.1.Impacts of options to achieve specific objectives 1 & 2

6.2.Impacts of options to achieve specific objectives 3 & 4 7.How do the policy options compare? 7.1.Options to address specific objectives 1 & 2 7.2.Options to address specific objectives 3 & 4 8.Preferred option 9.How will actual impacts be monitored and evaluated? 10.ANNEXES

Glossary Term or acronym Meaning or definition 15 minutes delayed data rule According to this rule, trading venues and reporting agencies have to make available their market data free of charge after 15 minutes. The rule is a remnant of a traditional exchange practice of publishing market data after 15 minutes free, essentially because the data has lost its commercial value after that period. APA Approved publication arrangement (APA) is a person authorised under MIFID II to provide the service of publishing trade reports on behalf of investment firms (Article (4)(1)(52) MiFID II). API Application Programming Interfaces BBO Best bid and offer. The best bid price is the highest binding bid price to buy a financial instrument and the best offer price is the lowest binding price to sell a financial instrument. CLOB Central Limit Order Book. A transparent system that matches customer orders (e.g. bids and offers) on a 'price time priority' basis. The highest ("best") bid order and the lowest ("cheapest") offer order constitutes the best market or "the touch" in a given financial instrument trades on the CLOB. CMU Capital Markets Union Core market data Minimum set of trade data to be provided by a consolidated tape. The two main components of core Market Data are pre-trade data (i.e., information about orders or quotations) and post-trade data (i.e., information about executions including (1) financial instrument name (standardized instrument identifier that applies across venues); (2) best bid and offer, (3) transaction price and quantity/size executed at the stated price; (4) standardised code identifying the execution venue; (5) timestamp and (6) trade conditions (execution protocol/execution flag)). CT Consolidated Tape CT Plan Consolidated Tape Plan. The entity administering the remuneration of the revenue flows generated by the consolidated tape and appointing the technology provider(s) that operate the consolidation of core market data.) CTP Consolidated Tape Provider (the entity responsible for administering the tape, notably receiving, consolidating and disseminating the core market data from trading venues and APAs, DVC Double Volume Cap. Under MiFID/R, the percentage of trading in a financial instrument carried out on a trading venue under the negotiated trade and the reference price waivers is limited to 4% of the total volume of trading in that financial instrument on that trading venue, calculated over the previous twelve months. Union-wide trading in a financial instrument under those waivers may not exceed 8% of the total volume of trading on all venues throughout the EU over the previous twelve months. These caps are measured over a rolling twelve-month period. ESMA is mandated with publishing and updating this data on a monthly basis. EBBO European Best Bid and Offer – the best bid vs best offer spread available at the most competitive trading venue in the Union (identified by the consolidated core market data tape) ESMA European Securities and Markets Authority ESAs Review Regulation (EU) 2019/2175 ETD Exchange-traded Derivative means a derivative that is traded on a regulated market or on a third-country market considered to be equivalent under MiFIR ETF Exchange-traded Fund, a collective (retail) investment vehicle, that issues participation rights (units or shares) that can be traded among investors. EOD End-of-day; one of the potential delivery modes for a consolidated tape. FINRA Financial Industry Regulatory Authority, a US self-regulatory organisation (SRO). FIX protocol The Financial Information eXchange (FIX) protocol is a messaging standard developed specifically for the real-time electronic exchange of securities transactions. FIX is a public-domain specification owned and maintained by FIX Protocol, Ltd (FPL). HFT High Frequency Trading IIA Inception Impact Assessment IPO Initial Public Offering ISIN An International Securities Identification Number ( ISIN ) is a 12-digit alphanumeric code that uniquely identifies a specific security. The organization that allocates ISINs in any particular country is the country's respective National Numbering Agency (NNA). ISO International Organisation for Standardisation, the world’s largest developer of voluntary international standards, covering inter alia, information technology used in the financial sector (the relevant committee is entitled “information technology” and was created in 1987 to develop information and communication technology standards for business and consumer applications. Latency Time required for delivery of a data feed. Low latency denotes a fast delivery speed, whilst high latency denotes a slower delivery speed. Latency is usually measured in milliseconds, microseconds or nanoseconds. LIS Large in Scale. The LIS waiver is available where an order is considered to be “large in scale” compared with normal market size. This is the case if it is equal to or larger than the minimum size of order specified in the Annex to the MiFID/R regulatory and implementing technical standards. It allows to waive transparency for what is generally known as block trades or high-volume transactions. Market data Market data includes the following elements: Pre-trade data comprises the visible prices and volumes of orders placed in order-driven markets or visible quotes advertised in quote-driven markets. Orders are firm and participants can interact with every order that they can see. Quotes may only be firm up to the advertised size but, even then, may have to be negotiated. Participants are not guaranteed to be able to interact with orders and quotes that are not visible to the market such as for large-sized trades or trades that are subject to other special conditions. Post-trade data comprises the prices and volumes of trades that have been executed against those visible orders or quotes, as well as trades executed against orders and quotes that were not visible to the entire market. MiFID I Directive 2004/39/EC (Markets in Financial Instruments Directive) MiFID II Directive 2014/65/EU (Markets in Financial Instruments Directive) MiFIR Regulation (EU) No 600/2014 (Markets in Financial Instruments Regulation) MiFID/R The overall framework comprising MiFID II and MiFIR MMT Market Model Typology, an industry data reporting standard MSP Market Structure Partners, consultancy that published a report for the EC on the tape MTF Multilateral Trading Facility – a MTF offers trading in financial instruments that are listed elsewhere (the “unlisted trading privilege”).The main difference between an MTF and an OTF (see below) is that an OTF can only offer trading in non-equities, whereas MTFs can offer equities and non-equities. [MTFs can also be registered as ‘SME Growth Markets’ in which case they serve as a primary listing venue.] NAV Net Asset Value NCA National Competent Authority OTC Over-the-counter – OTC trades are not executed on a regulated market, MTF or OTF. OTF Organised Trading Facility – an OTF is a multilateral system that offers trading in non-equity instruments, such as bonds and derivatives. PFOF Payment for order flow (PFOF) is the compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution. The brokerage firm receives a small payment, usually fractions of a penny per share, as compensation for directing the order to a particular market maker or exchange. PBBO Primary Best Bid and Offer – the best bid vs best offer spread on the primary (listing) exchange QuickFIX/J QuickFIX/J is a full featured messaging engine for the FIX protocol. It is a 100% Java open source implementation of the C++ QuickFIX engine. RM According to MiFID/R, a Regulated Market (RM) is a multilateral system that is operated or managed by a market operator and that brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments within the system. RMs are often referred to as “exchanges” or “stock exchanges”. RPW Reference Price Waiver. The reference price waiver for MTFs or RMs allows for orders to be matched at the midpoint of the best bid and offer price available on the trading venue where that financial instrument was first admitted to trading or the most relevant market in terms of liquidity. SEC Securities Exchange Commission (US securities market regulator) SI Systematic Internaliser. MiFID/R defines SIs as “investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, an MTF or an OTF”. TRACE Trade Reporting and Compliance Engine UTP Unlisted Trading Privilege – the ability of an alternative trading venue, such as a MTF or OTF, that have not listed a financial instrument to nevertheless offer trading in that financial instrument in competition with the original listing exchange.



1.Introduction: Political and Legal Context Political context. This initiative is part of the Commission’s 2020 Work Programme. It is one of the actions proposed by the European Commission to implement the current European Commission’s objective of ensuring An Economy that Works for People implementing the CMU and protecting particularly smaller and retail investors by enabling them to easily access market data and reducing the information asymmetries between different market players. In the 2020 CMU Action Plan the Commission announced that it would put forward a legislative proposal by the end of 2021 to create a centralised data base meant to provide, for equity and equity-like financial instruments, a comprehensive view on market data, that is prices and volume of securities traded throughout the Union across a multitude of trading venues. This centralised data base, also referred to as the ‘consolidated tape’ would have the objective to “improve overall price transparency across trading venues”. In its roadmap on ‘The European economic and financial system: fostering openness, strength and resilience’ of 19 January 2021, the European Commission confirmed its intention to propose to improve, simplify and further harmonise capital markets’ transparency, as part of the review of the MiFID II and MiFIR framework (MiFID/R). In the wider context of the efforts aimed at strengthening the international role of the euro, the Commission announced that such reform would include the design and implementation of a consolidated tape, in particular for corporate bond issuances with an aim of increasing the liquidity of secondary trading in euro-denominated debt instruments. Legal context. In 2007, MiFID I introduced competition in the market for equity trading. In later iterations of MIFID, competition was extended to trading in non-equity asset classes, such as bonds and derivatives. The consequence is that, when a broker or investor wants to execute an order to buy or sell an asset, it can choose from different venues, such as regulated markets (RMs), multilateral trading facilities (MTFs), dark pools, and systematic internalisers (SIs). As shown in an Oxera report for the European Commission in 2011, the introduction of competition resulted in more choice and reductions in trading fees. Since MiFID I entered into application, the combined amount of multilateral venues and SIs across all asset classes in the EEA increased by 344, leading to a total of 476. Each of these trading venues and SIs have to disclose to the public their market data. Across asset classes, this adds up to a total of more than 400 market data sources. Every trading venue is charging a license fee. Soon after MiFID I was implemented, the issue of market data fragmentation and market data monopolies, came to the fore, primarily in equity markets. MiFIR, in application since 3 January 2018, recognises the investor benefits of consolidating the market data that is published by the different execution venues. MiFIR therefore comprises the concept of a ‘consolidated tape provider’ (‘CTP’). The idea behind a CTP was simple: exchanges, alternative trading venues and/or their approved publication arrangements (APAs) would send real-time data streams to accredited consolidated tape providers (CTPs). Those CTPs would make available to the public the exact same information, at so-called reasonable cost, using identical data tags and formats. The framework was set up under the assumption that market forces would lead to its creation by private actors (competing consolidators). Based on the MiFIR provisions, there can be multiple competing CTPs, but it is also possible to have one single CTP in case multiple providers do not step up. To date, this has not happened for a variety of reasons. This impact assessment will analyse why no CTP has come forward and assess various options to finally facilitate the emergence of a CTP. 2.Problem definition 2.1.Main stakeholder views DG FISMA consulted five stakeholder groups on the initial and revised problem descriptions: 1) stock exchanges, 2) alternative trading venues, 3) asset managers, 4) executing brokers, and 5) market data companies. Each of these stakeholder groups put the emphasis on different aspects of the problem definitions, but there is wide agreement that market data fragmentation and market data quality issues cause information deficiencies which are detrimental to an efficient capital market. Stock exchanges stressed the lack of uniform market data quality across trade execution venues, singling out the insufficient quality of market data delivered by investment banks (SIs) that systematically internalise share trades and investment banks trading over-the-counter (OTC). Exchanges do not believe that the need to license market data from individual trading venues causes problems for market data consolidation. Alternative trading venues stressed the need to improve overall market transparency and best execution for professional clients. Asset managers and executing brokers stressed the aspects of intra-day liquidity and execution risk that results from fragmented market data sources that are prohibitively expensive to consolidate into an overall view of all execution markets. Asset managers also stressed the lack of clarity or where to locate liquidity to execute their orders throughout the trading day. They stressed that making consolidated market data available with a time-lag or only at the end of the trading day would achieve nothing to reduce their liquidity and trade execution risks. Data companies stressed the impossibility to consolidate market data due to what they perceive as insurmountable market data licensing obstacles (both in terms of the amount of licenses required and the high cost of market data licenses). Data companies also stress that market data quality is insufficient to allow for cost-efficient consolidation and that application of the “15 minutes delayed data rule” also to a consolidated market data product leaves no commercial incentives to provide a consolidated market data stream. Most stakeholders, with the exception of stock exchanges, believe that intra-day liquidity and trade execution risk can only be managed if market data (prices and available volumes) is consolidated and disseminated in as close to “real-time” as possible to the entire market. Stakeholders have also mentioned that opacity on available prices has spawned practices such as payment for order flow. Such practices are greatly facilitated by the impossibility for (retail) investors to verify whether a broker that has “sold” their order flow to an execution venue has obtained best execution in return. For stock exchanges and some of the main data vendors there is also the fear that a consolidated market data product might cannibalize the important (and growing) revenue stream of their existing venue-specific proprietary market data products.

Most stakeholders are neutral on how many consolidators are active in the market. Small data companies like the competing consolidator model (as they perceive this as an easier path to market entry), while the bigger data companies (and some of the smaller companies) would prefer the single consolidator model as it provides them with exclusivity. For end users (asset managers, brokers) the specific features of the tape operating model are less important than the speed at which the market data is disseminated to the market. 2.2.What are the problems? 2.2.1.Sub-optimal trading decisions cause investor detriment The absence of a consolidated view of prices and liquidity available in all trading markets is a problem when a financial instrument is made available for trading not just on a single listing venue, but across several competing venues. An investor then has, and should have, the choice between competing venues, but currently has to rely on market data that only cover individual venues. As a result, investors have insufficient access to consolidated and comparable market data. This prevents them from holding their securities brokers and broker-dealers accountable on whether they achieved the best execution for any given trading order. Securities brokers and broker-dealers are responsible for providing best execution — achieving the most advantageous transaction in terms of price and the lowest total explicit and implicit costs to investors. Best execution means that the broker has to show its customers the prices at which they bought and sold compared with prices and volumes available on different exchanges and alternative trading venues at the time the trade was executed. In the absence of a consolidated view of available prices, this burden of proof cannot be met. The broad dissemination of market data is essential for all market participants in order to make informed investment decisions. The absence of broadly available market data is detrimental for the operation of securities markets, but especially to retail investors and smaller issuers. A lack of access to data by all market participants is a significant barrier to cross-border investments and is one of the main reasons why national markets remain fragmented along national lines instead of integrating into a single, globally competitive CMU. The cost to procure market data from multiple trading venues currently accounts for roughly 2/3 of the overall cost of assembling market data. Because of this, data vendors, who make this data available to users, tend to narrow the sources of data sources in assembling their market data products. As a result, investors lack a comprehensive view of liquidity across all trading markets and most investors are unable to afford the cost of obtaining a more comprehensive view. Who is affected and how? Data vendors already offer proprietary versions of consolidated tapes. However, no data vendor has been able to provide a complete picture of EU trading in any asset class. Moreover, as data vendors interpret the data fields and choose the venues they incorporate, they differ not only in terms of market coverage, but also on the level of detail provided or data tags and will provide different results for the same securities. The cost of producing and normalising bad quality data has led to additional expense and asset and portfolio managers complain that data providers are charging high fees for their data feeds. As a result it is very costly for all investors and their intermediaries to manage their liquidity and trade execution risk and to determine whether they achieved best execution for their trades, as verification of the best price currently requires a subscription to a proprietary market data product produced by a data vendor or the proprietary data feed that each stock exchange offers for its venue. While some of the big sell-side banks have the resources to subscribe to data flows from many of the execution venues (a practice known as “self-aggregation”), the vast majority of brokers and investors can only afford to subscribe to the data flow of a few of the primary listing exchanges or the most important alternative trading platforms in terms of market share. 2.2.2.Absence of an accurate view of prices and liquidity in the markets causes contestable execution practices A partial view of the market facilitates liquidity risk management and trade execution practices that might not always be in the best interest of retail investors, such as online brokers deciding that it is easier to send all of their retail order flow to one particular high-frequency trader or exchange against a remuneration – “payment for order flow” (PFOF). Zero-commission equity (stock and exchange-traded fund) brokerage has brought trade execution practices, such as PFOF, to the fore. PFOF has become a major revenue source for certain retail brokers. For the retail investor, the problem with PFOF is that the brokerage might be routing orders to a particular market maker or execution venue for their own benefit (to maximise the payment they receive for order routed to a executing broker or venue), and not in the investor’s best interest. Retail investors, who tend to trade in smaller order sizes, do not have an objective price benchmark to assess whether PFOF positively or negatively affected the prices they pay for a security or the return they receive by selling a security. Without an objective price benchmark, it will be impossible for the retail client to ascertain whether their PFOF recipient broker has achieved “best execution”. 2.2.3.High levels of liquidity and trade execution risk Liquidity and trade execution risk is caused by a lack of correct information on prices and available trading volumes for traded securities. This means that investors do not have an accurate picture of what a security (e.g., a share or a bond) is worth and where an order can be filled at the best price and with minimal risk of not being executed or not being executed in full (implementation shortfall). Liquidity risk, as pointed out in the Market Structure Partners (MSP) study ‘The study on the creation of an EU consolidated tape’, is a consequence of the need to navigate the fragmented execution markets in the Union without a comprehensive picture of all available sources of liquidity. The economic cost of imperfect market transparency can be measured, both in terms of “implementation shortfall” (trades are executed at prices that do not reflect the best available sales offer or purchase bid) and in terms of missed trading and investment opportunities. These costs go against the objectives of the CMU, which is to provide well-functioning, liquid and integrated capital markets. The impact of market fragmentation, especially across national lines, is particularly acute for smaller asset managers and smaller banks that do not have the same possibilities to check accuracy of market data across multiple venues (information on the price of assets and the available amount of liquidity) as sophisticated market participants, such as large “sell-side” investment banks or electronic market makers. Because price and liquidity information for a smaller investor or asset manager are generally incomplete, these investors have a limited view of how much liquidity is “addressable”, i.e. how much of the liquidity is available for executing their investment decisions. Without clear and complete cross-market information, investors need to base their trading decisions, including brokers’ decisions, on which venues they need to be members of, on incomplete market data (prices and/or available supply) which makes the process inefficient and drives the costs up for investors. In equities markets, asset and portfolio managers interviewed as part of the MSP study estimate the annual cost of not having a complete and accurate view of market data (defined as “slippage”) as anything in the range of 0 to 1.0 basis points, although some rated it even higher as slippage of above 5.0 bps. The larger the trade to be executed, the higher the liquidity risk (i.e., the risk that there is not enough liquidity to execute at a given limit price or in a given time period). While it is true that on average larger asset managers have higher trade sizes, any asset management firm could face the need to execute a large trade (large investor redemptions or large investment inflows that need to be invested in the capital markets). Intra-day liquidity management needs (for all types and sizes of investment managers) are especially acute in times of price volatility. Executing brokers (investment firms) are equally affected in that, in the absence of reliable market data, they often find it difficult to prove compliance with best execution to their (retail) clients. For retail investors themselves, the impact (in terms of % slippage and/or inferior price taking) is expected to be even larger as they have even less information at hand. In absolute terms, the impact may be small but not as a % on their smaller trades. For investment banks, the impact is expected to be smaller especially when they are large. Respondents to the MSP study make different estimates on the cost inherent in having an imperfect view of the market. The larger the firm and the more extensive the resources available to compile and clean the data, the lower the estimate might be. By applying these estimates to the annual traded value of European equities, the total cost of not having an accurate view of the equities markets can be as high as EUR 10.61 billion annually whereas almost a third of the respondents indicate that the cost is between half and one EUR billion annually (MSP study, Figure 14, p 42).For bond market data, asset managers estimated the cost of inefficiencies resulting from a lack of consolidated and accurate market data in basis points to their annual trading strategies of not having complete and accurate data to properly size orders for optimal execution (Figure 16 of the MSP study, p 43). Unlike for shares, retail investors do not invest directly in bonds. As above, for investment banks the impact is expected to be smaller especially when they are large. Liquidity and trade execution risk due to an incomplete view of the market is also prevalent in the derivatives markets that are not traded on venues but ‘over-the-counter’ (OTC). Important OTC derivatives are euro-denominated interest rates derivatives and credit risk derivatives. OTC derivatives markets are dealer markets, where major swap dealers, mostly international banks, offer bespoke contracts to their clients, e.g., for taking a position to protect against future price movements (hedging). OTC contracts are mostly not post-trade transparent. The 2020 ESMA annual statistical report shows that OTC derivatives still account for 85% of the notional value of derivatives traded in the Union. Because there is currently no consolidated public view of prices for OTC derivatives, the high percentage of OTC trading contributes to opacity in the pricing of these derivatives and, in consequence, to information asymmetries that primarily hurt smaller market participants. The absence of consolidated market data also prevents accurate portfolio valuations, reduces the accuracy of indices across all asset classes (European equity, bond and derivatives benchmarks are less reliable). Large cap stocks is favoured by most (retail) trading, as evidenced in the large number of investment indices that focus on the large cap universe of listed companies (e.g., DJ 100, S&P 500, STOXX 600). The economic cost of informational inefficiency results in less investment indices that comprise smaller capitalisation companies and, in consequence, less index-driven funds channelling capital to smaller cap issuers (e.g., by virtue of exchange-traded funds that track a small or midcap index). Who is affected and how? According to the MSP study (pages 40-45), asset and portfolio managers that are collectively responsible for managing and trading trillions of euros of assets on behalf of individual investors report that the lack of an accurate consolidated view of prices and liquidity available across the Union’s trading markets means they currently have to rely on sub-optimal data when seeking to manage and trade investments for their clients. In many interviews leading up to this impact assessment it has emerged that almost no market participant has a consolidated view of the entire liquidity available in the Union’s trading markets. Conversations that DG FISMA had with smaller, regional banks tend to indicate that some investors and their financial intermediaries may not even realize that they do not have market data covering all liquidity available in the market. Investors are often unaware of the (degree of) fragmentation of the European trading markets and do not know which data they require to make the right choices as to when and where to execute a trade. Investors are also confused about the myriad of data dissemination policies by existing trading venues, while the need to subscribe to a variety of data products in parallel adds to the cost. The largest, most sophisticated investment firms and execution brokers enjoy an informational advantage as a result. 2.2.1.Existing market data products are not fit for managing liquidity and trade execution risks Existing execution venue specific (proprietary) market data products that have emerged under MiFID I and MiFID/R are not fit for obtaining an overview of prices and liquidity available across trading markets. The dispersed proprietary data products are also not fit as raw materials for consolidating market data. Assembling a consolidated tape from proprietary data products obliges a market data consolidator to negotiate market data contributions with potentially over 400 venues and APAs. Negotiation of often very complex licensing arrangements are an obstacle to consolidating dispersed market data. The COBA project was released in November 2012 after the FIX Trading Community provided a set of guidelines for how trade reports and market data should be consolidated. The initiative had even established a revenue allocation plan similar to how the consolidated tape operates in the US. In the end, the project did not get the necessary support from data suppliers and data vendors. Without a legal framework that accelerates and facilitates data licensing and data reporting, there was no business case for launching a consolidated tape. Who is affected and how? A commercially operated CTP is in the business to make money and, if there is no certainty on how and at what cost the market data “inputs” can be obtained, a commercial entity will have no motivation to enter the market for data consolidation. With the current legal framework, there is no commercial reward for providing a consolidated market data product.

2.3.What are the problem drivers? Two main drivers, (1) low quality of market data and (2) complex market data licensing policies imposed by market data suppliers, were most often mentioned as the main obstacles to obtaining a real-time view of prices and liquidity available across the various trading markets in the Union. 2.3.1.Low quality of market data The ESMA register identifies more than 400 public trading data sources. The more than 400 data contributors currently do not report their market data in the same manner. Each one of these venues, or the APAs mandated by investment firms trading OTC, produce their own proprietary market data feeds, largely using different data reporting standards and often entirely different ways of accessing the data. For example, current reporting standards leave discretion in the interpretation of various reporting data fields. The consequence is that data contributors report similar transactions using different data fields and (post-trade) reporting flags. These differences in interpreting prescribed data fields gives rise to low quality market data reports and results in regulatory reporting arbitrage, sometimes even paving the ground for deliberate mis-reporting of trades. Different interpretations of data reporting fields have resulted in low quality data reports across multiple execution venues. Low quality data reports have undermined the attempt to consolidate data from various trading markets into a single view of liquidity across the Union. Consolidating the data from the heterogeneous reports, both in terms of substance as well as in terms of format, has proven to be difficult. The principal driver explaining the absence of a consolidated view of liquidity is therefore linked to the way that market data is reported. Market data licensed by trading venues and APAs for OTC trading (market data contributors) is therefore not easy to produce because the currently applicable market data reporting fields (e.g., type of instrument, price, volume, execution platform or execution protocol) and post-trade reporting flags (order book trade vs. trade executed under a transparency waiver) are interpreted differently by the different market data contributors. Some of the non-exchange data, especially the OTC data, as a consequence, has proven to be inaccurate. The reason for the mis-reporting lies in the fact that the current MiFID/R framework creates ambiguity in how market data originating from trading venues and OTC trading needs to be reported. In addition the MiFID/R rulebook contains rules and exceptions that govern the transparency around the execution of transactions in equities, bonds and derivatives. The necessary rebalancing between the competing interests of transparency and protection against “price reversion” (when larger orders move the public prices, creating volatility and execution uncertainties) has not only led to a complex system of rules and exceptions, but also created a high level of complexity on how and when trades have to be reported. The proliferation of exceptions to trading on order book has likewise led to uncertainty on how to report certain types of transaction (under which type of “reporting flag”). For example the French securities markets regulator (AMF) reports that early reports on SI market share in equities volumes were inaccurate because the regulatory data reporting formats were interpreted differently by different market participants. The AMF calculates that by, e.g., excluding mis-reported intra-group SI transactions, the percentage of amounts from SI transactions involved in the price formation process and accessible to clients did not account for more than 8% to 10% of total trading volumes in French equities in the first quarter of 2020 (instead of a previously reported 30%). Uncertainty on market data reporting implies that not all execution venues or APAs take full responsibility for the quality of the reported market data. It also entails that a potential provider of a consolidated tape is not limited to consolidating the data, since currently the market data consolidator would also be responsible for parsing and cleaning-up the data received from the different execution sources. As long as market data contributions are not standardised, the data consolidator cannot publish consolidated data close to the execution venue’s time-stamp of the transaction. Who is affected and how? Market participants have provided examples of low quality of trade reporting data for both for equities and non-equities. For shares, issues have resulted in particular from interpretative differences around the reporting of certain trades, in particular on whether to qualify certain types of transactions as price formative or not.. This has led to a difficulty to paint a consensual picture of the share trading landscape. For non-equities, data analyses have highlighted insufficient quality in particular for OTC data. Securities brokers and broker-dealers are responsible for providing best execution — achieving the most advantageous transaction in terms of price and the lowest total explicit and implicit costs to investors. But to do so, these financial intermediaries need data covering the entire liquidity available in the Union’s trading markets. Without mandated common standards for reporting (i.e., tagging, formatting and identifiers), different venues may provide value for their own paying data customers, but present a dilemma for any data consolidator tasked with consolidating the market data from multiple markets. 2.3.2.Complex market data licensing schemes Fragmentation of market data sources increases dependency on multiple, venue-specific, proprietary data streams which only cover a partial view of available trading liquidity. Verifying whether all market data sources provide access to their market data in a fair, equitable and timely manner is made difficult by the complexity of how proprietary market data is licensed and how compliance with usage restrictions is administered. This complexity includes different pricing tiers; separate charges for connectivity, data, distribution and derived publication; usage or user type based pricing, as well as the complexities and costs of compliance with market data policies and reporting or audit requirements. The following submission of a major asset manager, included in the ESMA ‘MiFID II/MiFIR Review Report No. 1’, sums up the data licensing conundrum that has been raised by many stakeholders: “Data licensing agreements in particular are often complex, with subscribers asked to pay for data on the basis of both individual use cases, and for each individual user. The fact that trading data from individual venues is unique and non-substitutable has, in our view, allowed data licensing agreements to become increasingly detailed and onerous. Firms receiving market data therefore face significant complexity in managing ongoing variation in their licensing agreements, incurring operation costs and risks; they also often bear the cost of complex audits of their licenses, imposed by data providers through ex-post fees.” Apart from the heterogeneous quality of market data, the complexity of licensing market data is a major impediment to procuring the data necessary to create a consolidated view of all liquidity in a given financial instrument across the Union Who is affected and how? In light of the heterogeneous market data pricing policies across the single market, it is difficult for a consolidator of market data to access proprietary market data streams on fair, equitable and timely conditions. In its report on the consolidated tape, ESMA took the view that the current MiFID II rules do not oblige trading venues and APAs to submit market data to a consolidated tape on fair and reasonable terms. ESMA also notes that the current rules do not equip the provider of a consolidated tape with the means to obtain market data in conditions that provide for a viable business model to provide a consolidated tape. Therefore, ESMA suggests that trading venues and APAs should be required to provide data to the consolidated tape either by (i) requesting trading venues and APAs to provide data to the consolidated tape, or, (ii) setting forth criteria to determine the price (and usage terms and conditions) for contributions to the consolidated tape. According to ESMA, MiFID/R did not deliver on its objective to create more clarity on licensing and pricing of proprietary market data. Prices for market data, in particular for data for which there is high demand, such as non-display data, have increased since 2017., One trade association estimates that the total costs of data for a hypothetical small principal trading firm with access to various venues have increased by 27% from EUR 917.000 in 2016 to EUR 1.16 million in 2019. 2.4.How will the problem evolve? In the absence of clear data reporting and licensing standards, there will be …. … no consolidated view of markets in any of the MiFIR asset classes (Scenario 1: highly likely) Without further action in amending the MiFIR rules on market data reporting, data publication and data consolidation it is highly likely that no provider of a consolidated tape will emerge in any of the three relevant asset classes (equity, bonds or derivatives). ESMA identified three main deficiencies of the current MiFIR framework: (1) no commercial rewards for consolidating market data that is currently offered by individual trading venues and their APAs; (2) the need to conclude individual licensing arrangements with potentially 400 execution platforms (170 to cover a consolidated tape for equities alone); and (3) insufficient transaction data quality, in particular for OTC and SI transactions.

…. one or several “delayed data” tapes (Scenario 2: likely, but not satisfactory) Market data providers that are currently active in the market for consolidating market data cannot make a consolidated view of even a part of the market available in less than 24 hours. Due to the bad quality of the data currently, these consolidators can only achieve consolidation among a partial set of trading venues in delayed form (T+24 hours). They explain the time lag by the need to “normalize” the various market data reports and employ considerable time and effort in reconciling non-harmonized reports to assemble a coherent data product. That said, even the delayed data stream, due to inconsistent OTC and SI trade-reporting practices, remains inaccurate. It cannot be excluded that, with the progress in data normalisation technologies, this time lag could eventually be reduced to twelve hours or even an end-of-day delivery target. Financial market participants do not consider that these delayed and partial consolidations represent a complete, timely and accurate view of all of the available liquidity in the market. Due to their delivery speed, they are also not a suitable tool for most of their intra-day trading needs. A delayed data tape would only be useful for market surveys and academic research into longer-term trends on market infrastructure. …. a voluntary ISO standard for core market data allows market data to be licensed to several providers of a consolidated tape (Scenario 3: unlikely and unstable) Trading venues active in a particular asset class agree, among themselves, on a harmonised data reporting standard that covers all core market data to be reported to the market data consolidator. The standard would be curated by an industry body set up by its sponsors. The voluntary standard could be endorsed by the International Organisation for Standardisation and thereby evolve into on ISO standard. An entity that wishes to use this harmonised data to provide a consolidated tape would register with that industry body and, in exchange for this registration, would obtain access to the standardised market data from the trading venues that participate in the harmonised data standard. For example, an entity registered for the consolidation of bonds, or a particular sub-category of bonds (e.g., sovereign issuances), would get permission to extract the harmonised bond trading data from the relevant trading venues, using a technology of their choice. Each data consolidator would be free to commercialise the consolidated data stream to clients at a price and quality standard of its choice. Prices and delivery parameters would be determined by the individual data consolidators. Each consolidator would carry out a cost vs revenue projection (individualised break-even analysis) to determine its pricing. Competition would be on price, speed and quality (business continuity, security, avoidance of “downtime” or outages). Scenario 3 would lead to competing consolidated tapes (i.e., several versions of the tape are offered for a particular asset class) that will not differ in terms of instrument coverage, but might well differ in terms of message capacity (measured in millions of messages that can be transmitted per trading day) reliability (measured in % of “uptime” vs “downtime” in a chosen reference period and speed (measured in nano-, micro-, or millisecond latency). Scenario 3 is highly competitive but potentially unstable as it depends on a data consolidator being able to obtain (license) core market data contributions form potentially 400 trading venues across the Union (as there would be a common reporting standard but no legislation mandating contributions). The model would also be commercially unstable as a system of “competing consolidators” is expected to drive down the price for a consolidated tape. The competing consolidator model will reach an equilibrium where there are a certain number ‘n’ of CTPs and excess profit is zero. In that equilibrium, every CTP is just able to cover its operating cost and remunerate its cost of capital. In consequence, there is no expectation that a competing consolidator model can generate excess profit that is allocated back to the data contributors. This prospect might dissuade market data contributors from entering into the necessary market data licenses with several competing data consolidators. For example, resistance by market data sources has stopped a previous effort at producing a consolidated tape based on voluntary harmonisation of reporting standards. … a private initiative for a single tape (Scenario 4: stable, but unlikely) A single consolidated tape emerges, against all the odds described in the ESMA report, without any further legislative change on the basis of voluntary industry consensus. There is no precedent around the world for such an outcome (the US consolidated tape was mandated by Regulation NMS), but it is theoretically possible that an industry consensus on the construction and design of a single consolidated tape emerges, especially for the two non-equity asset classes (bonds and derivatives). The operating model would be that trading venues that offer trading in the selected asset class (e.g., bonds) form a consortium to consolidate their proprietary market data streams into a single consolidated one. This implies that the trading venues participating in the construction of a consolidated tape would agree on a proprietary data reporting standard that each “data source” would voluntarily use to notify the agreed market data contributions to the operator of the consolidated tape. 3.Why should the EU act? 3.1.Legal basis The current MiFID/R framework consists of a directive (Directive 2014/65/EU, MiFID II) and a regulation (Regulation No 600/2014, MiFIR). The legal basis for the adoption of MiFIR is Article 114 of the Treaty on the Functioning of the European Union (TFEU). Article 53 TFEU is the legal basis for amendments to MiFID II. The reform assessed in this report concern the facilitation of market data consolidation and would therefore amend MiFIR. Therefore, the amendments proposed in this report would fall under Article 114 TFEU. Article 114 TFEU empowers the European Parliament and the Council to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. Article 114 TFEU allows the EU to take measures not only to eliminate current obstacles to the exercise of the fundamental freedoms, but also to prevent, if they are sufficiently foreseeable, the emergence of new obstacles. Article 114 TFEU allows for removal of all obstacles which make it difficult for economic operators, including investors, to take full advantage of the benefits of the internal market. Thus, Article 114 TFEU is the appropriate legal basis to address obstacles in data consolidation which result from (1) fragmented market data sources; (2) unclear market data reporting standards and (3) complex data licensing schemes for proprietary market data. These are the main drivers that prevent a consolidated view of trading liquidity across the Union and have to be addressed at Union level. Furthermore, Article 53 TFEU grants the co-legislators the power to issue directives aimed at making it easier for persons to take up and pursue commercial activities across the EU. MIFIR was already amended via the “ESA review” in order to include rules on the commercial activities of a consolidated tape provider. The proposed amendments comprise a set of rules governing the activities around consolidation of market data, such as rules on the data formats to be used when reporting data to a consolidator, legal obligation governing the provision of market data and the status and obligations of a market data consolidator. It is important that rules on applicable reporting formats and reporting obligations apply to all market data sources across the Union. 3.2.Subsidiarity: Necessity of EU action According to the principle of subsidiarity (Article 5.3 of the TFEU), action on EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU. Most of the issues targeted by this initiative aim to amend the existing market infrastructure framework laid down by MiFIR. It was already established at the time of its adoption that the aspects of the Union’s market infrastructure such as reporting of transactions and disclosure of trade data should be governed by a regulation. The current MiFIR rules on market data consolidation and the provision of a consolidated tape have not proven sufficient for the successful launch of such a tape for any of the MiFIR asset classes (equities, bonds or derivatives). The report therefore concludes that more precision in the rules governing data consolidation Trading in the main MiFIR asset classes take place across borders. Trading markets for various asset classes are dispersed across the Union and the conditions for executing trades require rules that apply across the Union. This includes, first and foremost, the availability of market data revealing price and liquidity for financial instruments that are traded across the Union. The above problem drivers could possibly be addressed through individual action by Member States. Member States could attempt to harmonise market data reporting standards and licensing conditions by means of national laws. But such national initiatives would not prove effective in addressing market data quality or licensing conditions. Different Member States might still adopt different standards or licensing conditions and some Member States might not take any action at all. As market data consolidation has to work across the entire Union, it is both more effective and efficient to address reporting standards and data licensing conditions, necessary for the production of a consolidated view of all trading markets at Union level. Standardisation of data reports and licensing conditions would also be strictly confined to reporting to the provider of a consolidated tape. For example, market data licenses that do not pertain to the production of a consolidated tape would not be the subject matter of the proposed rules. 3.3.Subsidiarity: Added value of EU action The actions needed to address the problems and drivers set out in section 2 can be better implemented at Union level. Because of their direct applicability across the Union, the deployment of policy tools contemplated in this report would clearly be swifter and more efficient than if similar initiatives were undertaken on Member State level. A patchwork of national rules on any of the initiatives analysed in this report would risk undoing the progress already achieved under MiFIR and towards achieving the CMU. Finally, the options considered in this report are calibrated such that they are suitable for reaching their objectives and that they do not go beyond what is necessary to do so.

4.Objectives: What is to be achieved? 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? Baseline 1 – the lack of a consolidated view of liquidity across trading markets will continue to result in economic cost for European investors. A direct cost of imperfect transparency is suboptimal trading decisions, decisions taken on only a partial view of all available liquidity. As described in Annex 3.1, beyond the actual trading of financial securities, there is a whole array of professionals that have functions such as issuing, asset allocation, portfolio/investment management, pre-trade analysis, in-flight monitoring of trades, post-trade analysis/ best execution and middle and back office processes/valuations that also rely on real time comprehensive market data. The economic cost of not having an accurate and comprehensive view of trading markets are manifold and described in the impact section. The Market Structure Partners study provides further detail. Baseline 2 – the lack of a consolidated view of liquidity across trading markets will continue to disqualify many small and midcap companies from the investment portfolios of most (retail) investors. The economic cost of informational inefficiencies varies in line with the liquidity of tradeable securities. In the current fragmented trading environment, this creates a tendency for smaller and midcap issuers to be less visible to potential investors than large caps. The lack of consolidated and accurate market data effectively disqualifies securities issued by small and midcap companies from the focus of the majority of the investors. Price and volume information is not readily available reducing the interest in those small and midcap companies, often excluding these issuers even from indices that focus on the small and midcap sectors. The incomplete market picture that results from imperfect transparency leaves retail and institutional investors unable to diversify their investment portfolio toward smaller and midcap issuers. 5.2.Options to achieve specific objectives 1 and 2 This report offers a separate analysis of various options on how to improve market data quality and facilitate market data consolidation (specific objectives 1 and 2– Options 1.1. to 1.5) and options on how a market data consolidator can obtain core market data and how to create a business case for market data consolidation (objectives 3 and 4 share - Options 2.1 to 2.3). Option 1.1 – Self-aggregation. Data reporting. Level 2 measures would harmonise the necessary market data fields for reporting of “reportable securities” (defined as all securities traded on a trading venue in the Union). Data reports would comprise the best bid and offer on an order book plus last sale (transaction) data from the market data contributor’s order book. These mandatory data fields would have to be used for mandatory contributions by all execution platforms that offer trading in or trade in “reportable securities’ to self-aggregators. Operating model. Self-aggregators are defined as market participants that collect and consolidate market data for their own (compliance) needs. Electronic market makers (high-frequency trading firms) or big investment banks have the capacity to become self-aggregators. Self-aggregators will collect market data from execution platforms and consolidate market data directly at a data centre on their own premises (decentralised consolidation). With this decentralized consolidation model it will no longer be necessary for market data to be collected at individual data sources and then to travel to a separate central location (the “hub”) from where it will be distributed to data users. Upon registration with ESMA as “self-aggregators”, market participants would be allowed to collect all core (harmonised) market data and consolidate the information solely for their internal use (harmonisation of reporting standards diminishes the cost of data consolidation). Self-aggregators would not be allowed to publish a consolidated tape. Selection of consolidator/exclusivity. There would be no selection process: any entity that wishes to self-aggregate the harmonised market data would have to register with ESMA and would obtain access to standardised core market data from the various trading venues directly (mandatory contributions). ESMA would ensure that self-aggregators comply with their obligations, notably with the obligation not to publish or otherwise commercialise the self-aggregated market data. There would be no exclusivity (no limits on the amount of self-aggregators registered with ESMA). Contestability of the market for consolidated data. There would be no public market for consolidated data. Self-aggregation would be a tool for market participants to manage their liquidity and trade execution risk “in-house” and to demonstrate their compliance with ‘best execution’ to their clients. Summary of Option 1.1 key features: ·Data reporting. Harmonised data reports will be made available to self-aggregators registered with ESMA; ·Operating model: decentralised consolidation from data sources directly to the data users’ premises; ·Selection: no formal selection process; ·Exclusivity: No exclusivity, self-aggregation for internal use only; ·Supervision: ESMA registration; ·Contestability: No formal replacement process required.

Option 1.2 – competing consolidators. Data reporting. As Option 1.1.The mandatory data fields are used for mandatory contributions by all execution platforms that offer trading in or trade in “reportable securities’ to competing market data consolidators. Operating model. The competing consolidator model takes a decentralised approach to core market data consolidation. Upon registration with ESMA, competing consolidators would be allowed to collect harmonised market data from the individual data sources (trading venues, APAs) and then consolidate this market data at the data centre where its subscribers are located (thus avoiding consolidation at a central hub). The decentralised model aims to avoid the monopoly of a single consolidators. It also aims to increase the speed and precision at which market data is collected and consolidated. A decentralised model for data consolidation (where data is collected across platforms and then consolidated directly at the subscriber’s data centre) aims to address geographical dispersion and latency by showing each market data subscriber its local reality. As a result, each subscriber will be able to observe the best price available from its geographical location, avoiding or reducing the phenomenon that valuable time is lost by sending the data first to a central “consolidation hub” and then retransmitting it back to the data centres of market data subscribers. Decentralised consolidation would avoid the criticism that the best quote displayed on a consolidated tape will no longer be relevant when a market data subscriber decides to redirect execution flow to the venue that has posted it. The decentralised model also aims to neutralise a common criticism made with respect to a consolidated tape: The fact that “best execution” is a local reality, true at one moment, for one specific location where the executing broker is located. Selection of consolidator/exclusivity. Any entity that wishes to use the harmonised market data to provide a consolidated tape would have to register with ESMA and would obtain access to standardised core market data from the various trading venues directly (mandatory contributions). For example, an entity registered for the consolidation of bonds, or a particular sub-category of bonds, would get permission to extract the bond trading data from all of the relevant trading venues. With Option 1.2, several competing data consolidators would provide the identical consolidated tape in parallel. They would compete on other services and quality features, e.g., on speed of delivery, maximising “up-time” or data consumption end-user interfaces. The number of competing consolidators would only be limited by the need for each of them to reach a break-even point covering their set-up and operating costs (there is no exclusivity). Contestability of the market for consolidated data. Harmonisation of mandatory data reporting standards for the supply of core market data by the various contributor venues would ensure that many entities could benefit from the harmonised data stream to offer competing products. As several competing consolidators would disseminate consolidated market data in parallel, the competitive process would ensure that the market for consolidated market data remains contestable. In order to further enhance the competitive process, competing consolidators would not be considered as “authorised entities” but would only have to register (electronically) with ESMA. The registration particulars would govern the responsibilities of the competing consolidators and contain details on the conduct of their business, fees and services details, and their operational capabilities. The registration would enable ESMA to determine whether a competing consolidator is in compliance with their duties and obligations under the registration scheme. Registration as competing consolidators would entail an obligation for those entities to inform ESMA on changes in their business model and operations prior to implementing a material change, as well as on systems disruptions and intrusions. ESMA will publish these disclosures which could be used by market participants to evaluate the services offered by competing consolidators. Summary of Option 1.2 key features: ·Data reporting. Harmonised data reports will be made available to market data consolidators registered with ESMA; ·Operating model: decentralised consolidation from data sources directly to the data users’ premises; ·Selection: no formal selection process; ·Exclusivity: No exclusivity; ·Supervision: ESMA registration; ·Contestability: No formal replacement process required; Option 1.3 – exchange consolidators. Data reporting. As Option 1.1. The different market data sources that do not act as the listing venue (alternative trading venues, SIs, OTC) provide harmonised core market data to the listing exchange pertaining to all EU ISINs listed on that exchange. This Option does not cover shares that are traded in the Union without a listing on an EU exchange. Operating model. The exchange-consolidator operates a centralised "hub and spoke model”. With this approach, the exclusive data consolidators collect data for specific stocks from geographically separated exchanges, consolidate the data in one centralized data centre, and then disseminate it from the central location to subscribers’ data centres that are in other locations. Selection of consolidator/exclusivity. ESMA would supervise the listing exchanges as far as the consolidation activity is concerned, but there would be no regular re-tendering of the exclusive consolidator function. The result would be that listing exchanges become the consolidators (the “hub”) for all market data that involve their listings. In practice, Option 1.3 would lead, e.g., to a separate tape for each European listed exchange (examples are Euronext, Deutsche Börse, NASDAQ OMX, BME, Vienna stock exchange, Warsaw stock exchange, etc.). For bonds and OTC derivatives, there is no listing exchange. The task of consolidating market data would fall on the MTFs or OTFs that are identified as the primary centres of liquidity for the relevant class of reportable security (e.g., government bonds, investment grade corporate bonds, high yield bonds or even distinct sub-asset classes within the above category of bonds). In order to create legal certainty, ESMA would select the consolidator in line with the determination of the primary centre of liquidity or ‘most relevant market in terms of liquidity’ in analogy with Article 16 of RTS 22. ESMA would also maintain and update a website comprising these primary centres of liquidity for a particular class of reportable securities. A primary centre of liquidity would be entitled to be the sole recipient of core market data in the identified asset class from all other venues offering trading in that asset class as long as it is not removed from the ESMA list. Contestability of the market for consolidated data. Due to the harmonised market data reporting standards, ESMA could, if need be, replace the exclusive data consolidator and replace it with an alternative provider. Exclusivity also entails that the current 15-minute rule (after which market data has to be made available for free) would not apply to the consolidated tape provider, but would be maintained for the current non-consolidated data feeds. As all the relevant data reporting fields (the “content” to be reported) and an agreed protocol for the delivery of this data (the “transmission” protocol) to the consolidator would be specified, an alternative provider could step in and take over the task of data consolidation, although with the exchange-consolidator model this might be difficult to achieve in practice (for a detailed analysis of ESMA’s powers and potential obstacles in their exercise, see Section 6.2). Summary of Option 1.3 Key features: ·Data reporting. Harmonised data reports pertaining to EU listed shares will be made available to the listing exchange;

·Operating model: centralised consolidation; ·Selection: no formal selection process, appointment of the listing venue (equities) or primary centre of liquidity (non-equities); ·Exclusivity: Indefinite exclusivity; ·Supervision: ESMA, but confined to the exchange’s consolidator function; ·Contestability: Formal replacement process in case of quality defects. Option 1.4 – single consolidator. Data reporting. As Option 1.1. The mandatory data fields would have to be used for mandatory contributions by all execution platforms that offer trading in or trade in “reportable securities’ to a single consolidator. Operating model. The single consolidator could operate either a decentralised or a centralised "hub and spoke model”. With the “hub-and-spoke” approach, the exclusive data consolidator would collect data for specific stocks from geographically separated venues, consolidate the data in one centralized (cloud-based) data centre, and then either disseminate it from such central location to subscribers or allow other market data publishers to tap into the cloud based data repository to disseminate the data to their subscribers. Compared to a decentralised operating model, a centralised model would be slightly less accurate in terms of the timeliness of the data provided on the consolidated tape. Selection of the consolidator/exclusivity. ESMA would be tasked to run an open tender to select a single provider of the data consolidation infrastructure necessary as the backbone for a consolidated tape. Regular re-tendering of the single tape infrastructure aims to avoid entrenching an infrastructure monopoly. The data infrastructure provider would be selected and authorised by ESMA. Contestability of the market for consolidated data. Due to the harmonised market data reporting standards which would ease the consolidation, ESMA could, if need be, replace the exclusive data infrastructure and replace it with an alternative provider (even in between regular tenders). As all the relevant data reporting fields (the “content” to be reported) and an agreed protocol for the delivery of this data (the “transmission” protocol) to the consolidator would be harmonised, an alternative provider could easily step in and take over the task of data consolidation. In addition, an authorisation requirement for the single consolidator would enable ESMA to determine whether the single consolidator remains in compliance with its duties and obligations throughout the period of exclusivity in the provision of consolidated market data. As with the registration of competing consolidators, the single consolidator would be obliged to inform ESMA of all changes in its business model prior to implementing them. The single consolidator would also be obliged to file regular information relating to systems disruptions and intrusions. ESMA would publish all disclosure made by the single consolidator so that market participants can use this information to evaluate the services offered by the single consolidator. Summary of Option 1.4 key features: ·Data reporting. Harmonised data reports will be made available to the single market data consolidator registered with ESMA; ·Operating model: centralised consolidation; ·Selection: formal tendering process for build and operation of a single “data ingestion infrastructure”; ·Exclusivity: Five year exclusivity for the infrastructure; ·Supervision: ESMA authorisation; ·Contestability: Regular re-tendering and formal replacement process in case of quality defects. Option 1.5 – the concentration rule. All trading in listed shares is concentrated on the listing exchange (for non-equities on the existing primary centre of liquidity), there is no need for consolidation of core market data with an exclusive or non-exclusive securities market data consolidator. This option would not involve the creation of a consolidated tape. This option would rather aim to consolidate the flow of market data (indirectly) by concentrating trading in certain asset classes on designated execution platforms. As trading practices differ among asset classes, this option would be asset-class specific: Listed instruments. Option 1.5 would entail that European market participants are restricted to where they can trade share listed on an EU exchange. This option contains a “concentration rule” that market participants can only trade shares below the current large-in-scale threshold on the “listing exchange” of the share. Likewise, only the exchange that designed and listed an exchange-traded derivative (ETD) can offer trading in that contract. The contract is then centrally cleared in a clearinghouse designated by the exchange.

Unlisted instruments. For unlisted instruments (bonds and OTC derivatives) ESMA would need to designate the primary centre of liquidity in a certain asset class (e.g., government bonds, corporate investment grade or high yield bonds or any sub-categories thereof) as the sole execution platform for this asset class. Summary of Option 1.5 key features: ·Data reporting. No harmonised data reports; ·Operating model: centralisation of trading on a listing exchange; ·Selection: no formal tendering process; ·Exclusivity: Indefinite exclusivity for the listing exchange; ·Supervision: National exchange supervision applies; ·Contestability: No contestability. 5.3.Options to achieve specific objectives 3 and 4 All options to achieve the specific objectives 3 and 4 can be combined with Options 1.1 to 1.4 on the operating model for the consolidation of core market data. Options on how to achieve consolidation of data and on how to generate revenue for compensating market data contributors are therefore separate and distinct. The decisive factor determining whether the provision of a consolidated tape generates revenue to be allocated to market data contributors is therefore not the chosen operating model, but whether the mandatory contributions are accompanied with either a minimum revenue target to be achieved with the sale of consolidated market data, a statutory subscription fee or a fee for “dark pool” trades. As a consequence of their distinct nature, the operation of the market data consolidation can be undertaken by entity that is separate and distinct from the entity that administers the allocation of tape revenues. Option 2.1 – Mandatory contributions with “minimum revenue targets” incumbent on market data consolidators. In order to avoid complex, individual market data licensing arrangements with often hundreds of execution platforms or their APAs that act as data contributors, all market data sources would have to make standardised core market data available to self-aggregators (mandatory contribution). Mandatory contribution of core market data would apply to all operating models that aim to consolidate core market data, be it self-aggregation, competing consolidators, exchange-consolidators or a single consolidator. Each of these consolidators would aim to cover operating and capital costs. In order to create additional revenue for allocation to market data contributors, there would be “minimum revenue targets” that form part of the selection process for a single consolidator (Option 1.4) or part of the registration process for competing consolidators (Option 1.2). The system of minimum revenue targets would not work for self-aggregators, as these entities do not publish data for third parties. The regulatory establishment of minimum revenue targets aims to avoid a situation in which the making available of the consolidated core market data streams will not produce revenue beyond the consolidators operating cost and the cost of their capital invested. The minimum revenue targets would be established and regularly reviewed by an independent operating committee. The operating committee would be comprised of industry stakeholders – both market data contributors, redistributors and market data consumers, with both retail and institutional representation. The operating committee could be structured as a body that advises the European Commission in the formulation of delegated legislation, along the lines of the technical expert group that advised the EC on climate change benchmarks. The operating committee would have responsibility for the revenue target as well as for the revenue allocation methodology. Participants in the operating committee should require the proof of relevant qualifications in economics and accountancy. The revenue targets would take into account various uses that subscribers make of the consolidated tape and take into account relevant parameters such as commercial redistribution, price referencing, indexing, syndication, sales of market data to media outlets. The revenue targets with respect to professional users could be set at levels sufficient to largely subsidize the cost of granting retail access for minimal or no cost. Several models can be envisaged on how to organise revenue allocations among market data contributors. A data contributor’s revenue share could be calculated as the arithmetic average of its percentage share of overall value traded in a particular financial instrument. The allocation formula would then simply be the contributor’s total value reported as a percentage of the total value of trading across the Union in that share. Hence, a participating venue that traded 3% of all reported value in a share traded on that day would receive 3% of that share’s total revenue. Additional modulations could be provided to avoid that market data contributors that offer trading in heavily traded “blue chip” issuances reap the main benefit from the allocation scheme. One option would be a preferential weighting for trading platforms that list thinly traded shares. As small cap stocks listed on smaller exchanges typically have wider spreads and lower trading volumes, incentives for smaller exchanges would mean allocating revenue based on the square root of the value reported to the CTP. That means a stock with 10 times the notional liquidity only counts for three times the revenues. Another approach would be to reserve a preferential tranche for smaller exchanges. In this option a “small” exchange is objectively defined as an operator that assembles more than a given percentage (e.g., more than 80%) of trading value on the original listing exchange, as a higher level of “concentration” in trade executions is a defining feature of smaller exchanges. The consequence would be that the bigger exchange operators would only get access to the tape revenue once the smaller exchanges have received revenue that corresponds to the reserved tranche. As mentioned above, the revenue allocation could be undertaken by an entity that is distinct from the operator of the consolidated tape. Summary of Option 2.1 main features Data licensing: Mandatory contributions to either a self-aggregator, competing consolidators, or a single consolidator Compensation for market data contributors: Minimum revenue target incorporated into the operating conditions of the market data consolidator Revenue allocation: allocation weighting in favour of less liquid shares or exchanges that assemble a high percentage of trading on the listing platform.

Separate data consolidator and revenue allocation functions: yes Option 2.2 – Mandatory contributions with statutory subscription fees. In addition to mandatory contributions, Option 2.2 would comprise statutory minimum subscription fees for consolidated market data feeds. Option 2.2 expresses a clear choice to regulate minimum levels data usage fees at the data consumer level. Option 2.2 is based on the assumption that market data contributors are adequately remunerated based on a participation in the profits of a consolidated market data feed. Making mandatory contributions contingent on a “revenue participation model” aims to create a commonality of interest between market data contributors and market data consolidators. By setting fee floors for the use of core market data, market data contributors participate in the commercial success of consolidated market data streams and share the risk of success of the consolidated market data product with market data consolidators. The subscription fees would be designed and regularly reviewed by an independent operating committee. The operating committee would be comprised of industry stakeholders – both market data contributors, redistributors and market data consumers, with both retail and institutional representation. The operating committee could be structured as a body that advises the European Commission in the formulation of delegated legislation, along the lines of the technical expert group that advised the EC on climate change benchmarks. The operating committee would have responsibility for fee management as well as for the revenue allocation methodology. Participants in the operating committee should require the proof of relevant qualifications in economics and accountancy. The appropriate subscription fees should take into account various uses that subscribers make of the consolidated tape and take into account relevant parameters such as commercial redistribution, price referencing, indexing, syndication, sales to media outlets. The various subscription fees should be set at levels sufficient to largely subsidize the cost of granting retail access for minimal or no cost. Rules on minimum end-user (and self-allocator) subscription fees would aim to cover the set up and operating cost of the chosen model for data consolidation and to create excess revenue to operate a revenue allocation scheme to remunerate core market data contributors (the allocation criteria would be the same as in Option 2.1 above). All forms of market data consolidators would be subject to a legal obligation to allocate revenue in excess of their operating cost to core market data contributors. Revenue to be generated would depend on the statutory fees that the regulation choses to impose on consolidators for the provision of the consolidated data: (1) One choice would be to establish an annual statutory subscription fee of e.g., EUR 25 per month per professional market data user. Non-professional users (defined as retail clients who subscribe to the data for personal use only and upon evidence of their status of non-professional users) would either obtain access to the tape via their brokers (indirect access) or would obtain direct access to core market data at an annual subscription fee for direct access by non-professional users. Due to their non-professional (private) usage, this fee would be significantly lower than the fee that market professionals would need to pay, e.g., maximum EUR 1/month,. If an investor would deem the cost of the CT too high, she can still choose to go to the respective venues for 15 minutes delayed data which remains free. Summary of Option 2.2 main features Data licensing: Mandatory contributions to either a self-aggregator, competing consolidators, or a single consolidator Compensation for market data contributors: Statutory subscription fess applicable to all categories of market data disseminators Revenue allocation: allocation weighting in favour of less liquid shares or exchanges that assemble a high percentage of trading on the listing platform. Separate data consolidator and revenue allocation functions: yes Option 2.3 – Mandatory contributions with compensation by means of a “reference price usage fee”. Option 2.3 envisages to ensure compensation for market data contributors by means of a usage fee for all execution venues that do not contribute to price formation in the equity markets (“dark trading”). Technically “dark trading” would be defined as offering trading in EU ISIN using a “reference price” established at the original listing venue for the relevant EU ISIN. In order to continue offering this form of trading that is not pre-trade transparent – no quotes are published and trades are executed at the reference price set at the primary market (either the “listing exchange” or the “most relevant market in terms of liquidity”), execution platforms that match trades using an a reference price “imported” from the listing exchange would need to “buy” the reference price by means of a monthly “ad valorem” fee, to be paid (for rebating back to the listing exchange) to the operator of the consolidated tape. The reference price usage fee would be designed and regularly reviewed by an independent operating committee set up in line with the committees described in Options 2.1 and 2.2. In addition to the possibility to separate the data consolidation from the revenue allocation function, this option would allow an even clearer separation between the data consolidation and the collection and administration of the “dark pool” fee. Summary of Option 2.3 main features Data licensing: Mandatory contributions to either a self-aggregator, competing consolidators, or a single consolidator Compensation for market data contributors: Statutory “reference price usage fee” to be paid by all market data contributors who operate a “dark pool” Revenue allocation: allocation weighting in favour of less liquid shares or exchanges that assemble a high percentage of trading on the listing platform. Separate data consolidator and dark pool fee administrator: yes. 5.4.Options discarded at an early stage Due to the rapid evolution of technology in collecting and storing market data no option on either the organisation of data consolidation or on the organisation of data licensing should be discarded upfront. Preference should be given to operational and market data licensing approaches that serve as a reliable price benchmark against which to manage their intra-day liquidity risk throughout the entire trading day. At a time when continuous intra-day trading is already under pressure on account of a significant shift towards trading “at the close (up to 25% of daily volume is currently transacted in the closing auction), promoting more intra-day order execution outside of the end-of-day closing auctions should guide the choice of options on market data consolidation and market data licensing. 6.What are the impacts of the policy options?

6.1.Impacts of options to achieve specific objectives 1 & 2 6.1.1.Impacts of Option 1.1 – self-aggregation Data contributors. Standardisation of market data reporting formats will facilitate self-aggregation of market data; most costs incurred by data contributors in the harmonisation of data reports are one off investments. The Oliver Wyman reports presents various estimates of the connection cost of delivering standardised data by stock exchanges: (1) EUR 10.000 per venue for an end-of-day tape; (2) EUR 50.000 per venue for a 15 minute delayed tape; (3) EUR 75.000 per venue for a real time transaction tape and (4) EUR 100.000 for a real-time pre-trade tape. On the basis that there are 15 exchanges that still operate separate platforms in each Member States (despite some exchanges forming part of a group, such as Euronext or NASDAQ), annual cost of harmonised data reporting across all stock exchanges would vary between EUR 270.000 and EUR 2.7 million. Other market data contributors (alternative venues, SIs and OTC traders) indicate a likely spend between EUR 500 000 – EUR 1 million (varying with size and data volume) in one-off costs to implement reporting systems that comply with the harmonised data reporting standards, which leads to an industry-wide switching or adaption cost of between EUR 85 and EUR 170 million . The industry-wide annual market data reporting cost would amount to between EUR 34 and EUR 67 million. It is possible that many of the venues and APAs, as specialists earning significant revenue from data resale and aggregation, could implement adaptations necessary to harmonise data formats at a lower cost, especially if market data is provided by an API directly to the various self-aggregators. These adaptation costs are deemed manageable for large market data contributors as they would amount to a maximum of EUR 1 million annually with a one-off cost between EUR 500 000 and EUR 1 million. On the other hand, self-aggregation does not produce a commercial product available to the wider market. However, alternative venues (MTFs that offer additional trading in shares listed on an exchange) would benefit from this option most as more professional and non-professional investors would become aware of the additional execution options they offer. It is likely that the increased Union-wide visibility of alternative venues for executing trades will increase competition, which they could benefit from. Exchanges would most likely benefit least from self-aggregation as most market participants already subscribe to the proprietary data feeds supplied by the principal listing exchange, including the data feeds provided by smaller exchanges. Data users. Data users having the resources to register as self-aggregators would benefit from a decentralized consolidation model, because they would not need to rely on market data which is collected and consolidated in a single hub before being disseminated to data users, a process which introduces additional latency into the data consolidation process. Instead self-aggregators would collect market data from the various data sources and consolidate the data in their own data centre. Accordingly, each of the self-aggregated data sets would show the information more accurately from each self-aggregators’ geographical perspective, which would narrow the “latency gap” that results from a centralised hub delivering market data to geographically dispersed data users. Latency benefits from decentralised self-aggregation would, however, not benefit all market data users. The population of self-aggregators would very likely comprise only large market data consumers, such as electronic market makers or the big investment banks. Smaller market participants would, at least not in the immediate and medium-term, have the capacity and resources necessary to self-aggregate. In this immediate or medium term, self-aggregation would therefore consolidate the bifurcation of the market between participants who have a complete overview of the market, delivered at low latency, and those who do not. For example, the MSP study identifies a handful of financial intermediaries that benefit from the current fragmentation of market data – large banks and HFTs/latency arbitrageurs. Self-aggregation would solidify these operators’ business model and entrench some of the informational advantages they currently enjoy. Self-aggregation would therefore increase information asymmetry. Retail investors. Benefits for retail investors would largely be indirect on account of the better liquidity risk management and trade execution achieved by the financial intermediaries who self-aggregate. The retail benefit would be increased if regulation made self-aggregation mandatory for all intermediaries in order to demonstrate compliance with ‘best execution’. Competition in the market for consolidated data. There would not be a public version of a consolidated tape, but many “internal” versions of such a tape established through the process of self-aggregation. The multitude of self-aggregated (consolidated) data flows would ensure that there is no monopoly for consolidated market data. 6.1.2.Impacts of Option 1.2 – competing consolidators Data contributors. Same as Option 1.1. Data users. Competing consolidators would collect market data from the various data sources and consolidate the data directly at their customer’s data centre. Accordingly, a direct venue-to-subscriber model will show the best bid and offer more accurately from each data users’ geographical perspective. Data users would get more a precise picture of the liquidity as the best bid and offer is provided from their individual geographical perspective, which narrows the “latency gap” that results from a centralised hub delivering data to geographically dispersed data centres (users). In addition, several competing consolidated tapes would give market data users a choice between competing versions of the single consolidated tape at the lowest possible latency; this means that a system of competing consolidators would reach the largest group of (geographically dispersed) investors. Competition between consolidators would focus on delivery speed, business continuity or the avoidance of “downtime”. Competing consolidators have the ability to compete on how to collect and transmit the market data to data consumers, resulting in different transmission latencies, throughput capacities, and data-feed protocols. Investors (the buy side) would be the main beneficiaries of a competing consolidator model. For the buy-side, in general, the consolidated tape will have the advantage that they will be able to get a complete overview of the entire liquidity in any given financial instrument. The tape will incentivize asset and portfolio managers to include in the portfolios they manage the most optimal (combination of) instruments available in the Union and not just the instrument available on the (few) venues whose market data they currently subscribe to. They would have the information allowing them to decide if they need to become member of (other) venues, when these venues provide the most optimal products for their purpose. It will function as an important guide to the buy-side trader on assessing and making their trading decisions and setting up their algorithmic parameters. The main investor (buy-side manager) benefit of a consolidated tape is the avoidance of liquidity risk and slippage. For equities, 56% of asset managers that participated in a survey conducted by MSP identified slippage of between 0-0.5 basis points as the main consequence of a lack of transparency with respect to liquidity in the market. Avoidance of this slippage would result in investor gains of up to EUR 1.06 billion. 11% of asset managers estimated slippage of between 0.5 up to 1 basis point. If this slippage could be avoided, investors stand to gain up to EUR 2.12 billion due to better trade execution results. 7% of asset managers estimated slippage between 1 of up to 1.5 basis points, the avoidance of this slippage would yield investor gains of up to 3.18 billion. 10% of asset managers estimated slippage of between 1.5 to 2 basis points, the avoidance of this slippage could yield investor gains of EUR 4.24 billion. Finally, 4% of asset managers estimated slippage at above 5 basis points. Avoiding this slippage could potentially yield EUR 10.6 billion for investors. For bonds, potential gains from a consolidated view of the markets would be even greater. This is because the estimated losses due to slippage by far exceed the above estimates for shares. 60% of bond asset managers interviewed for the MSP study estimated slippage costs of up to 5 basis points, 25% estimated slippage cost of up to 10 basis points, while 11% estimated slippage of up to 50 basis points. The absence of any reliable data for the traded value in bonds makes it impossible to quantify slippage in absolute terms. In terms of potential market data cost savings, large data consumers stand to benefit from competing consolidated tapes. For an average-sized investment firm (with 50 human users), current annual costs for “piecing together” a multitude of venue-specific market data products (including level 1, i.e., the first level of best bids and offers) are estimated at around EUR 300 000. Replacing this by a consolidated tape at a subscription fee of EUR 600 per user/year would result in annual cost of 30 000 per investment firm. In such a scenario each firm would be able to save 270 000 per year. On the basis that there are 6 501 registered investment firms in the Union, industry-wide savings for data consumers could potentially amount to EUR 1.75 billion per year. When looking at “winners and losers”, Option 1.2 favours most market participants other than market data contributors as the consolidated tape allows for lower market data prices. Retail investors. Benefits for retail investors would largely be indirect on account of the better liquidity risk management and trade execution achieved by their financial intermediaries. Nevertheless, a free or reasonably priced single tape could have positive impacts on more sophisticated retail investors who wish to diversify their investment portfolios and branch out into shares not listed on their local exchange. This is because Option 1.2 will lead to a complete and real-time view of price and liquidity for the entire market in shares or bonds in the Union. It is currently especially retail investors that have only access to 15 minutes delayed prices displayed by primary markets. , The broader availability of at least core market data would make these markets, including the non-equities markets, more accessible (and, in consequence, more “tradeable”) for all types of retail market participants. The main advantage of a consolidated tape is therefore that a retail investor gets the comprehensive view of markets that currently only the largest market makers have. This knowledge would allow the retail investor to be aware of the best prices and liquidity in the entire Union. The consolidated tape would for those retail investors likely become a reference price benchmark (to measure best execution). It would hence provide retail investors with a powerful “private enforcement” tool. The democratisation of liquidity insight will create a more level playing field for all participants in the equity, bond and derivative markets. Consolidated tape providers. Standard market data reporting formats will lower barriers to entry into the market for data consolidation. Several competing consolidated tapes will create opportunities for more than one entity to enter the market for data consolidation, creating opportunities for fintech and data companies. In order to allow for a break-even analysis for the provision of a consolidated tape, several entities submitted cost projections for setting up and operating a consolidated tape in the European topography. Box 1– Cost projections for a consolidated tape (relevant for Options 1.2, 1.3 and 1.4)

The projected cost for the provider of a consolidated equities tape (assuming a five year pay-back period range within the following estimates: Build/Setup costs: EUR 4-12 million = EUR 0.8-2.4 million annually; Running cost: EUR 7-27 million = EUR 1.4-5.4 million annually; Total cost: EUR 11-39 million = EUR 2.2-7.8 million annually. The projected cost (assuming a five year payback period for the provider of a consolidated bond tape/derivatives tape would be: , Build/Setup costs: EUR 0.8-7 million = EUR 0.16-1.4 million annually; Running costs: EUR 6.5-20 million = EUR 1.3-4 million annually; Total cost: EUR 7.3-27 million = EUR 1.46-5.4million annually. According to the providers of the estimates, there are no fundamental difference in the costs of data consolidation between a competing consolidator model and a centralised “hub-and-spoke” model. Differences in cost estimates would rather vary in line with assumptions on the specifications that the tape has to comply with (see Annex 3 for a description of the main cost drivers). The basic requirement for the equities tape is that it will collect, store and disseminate market data within 200 to 300 milliseconds of the timestamp of the execution venue. Data consolidators could be able to achieve additional efficiencies by selecting third party data services, such as ingesting, processing and storing the market data via the cloud. Speed of delivery was deemed a driver of cost only for with very low latency data feeds and connectivity. The incremental costs of reducing from low to very low latency increases exponentially. But speed would not be a main driver with a millisecond or as close to real-time as technologically possible delivery frame. The main cost driver is connectivity to data sources. The use of cloud-based data collection would, however, avoid the majority of the cost of connectivity and would support close to real-time delivery. Basing the operation of the consolidated market data on the cloud would align with major investment firms moving their own data collection and processing activities to the cloud. A cloud-based consolidated tape would therefore not only be cheaper than an operation based on physical private networks, but would also be more future-proof. The cloud was generally deemed as a core element to make market data consolidation viable. The cloud can avoid the creation of dedicated physical infrastructure. Building new physical infrastructure adds unnecessary build and switching cost and would pose a risk to market data consolidation. Cloud-based contribution mandates, harmonized input specifications and a common consolidation