Europe’s Consolidated Stock Market Tape Could Invigorate Trading and Boost Investment

Plans to publish live equity market data in Europe—known as a consolidated tape—are set to bolster the region’s stock markets by making it easier to trade and boosting equity listings, according to Goldman Sachs Global Banking & Markets.

The EU is due to activate the crucial piece of market infrastructure in the coming weeks, followed by the UK next year (though the UK will implement an interim solution, publishing overall daily market activity, before it launches the full tape).

The live market feeds will compile the best available prices and the total traded volume for publicly listed stocks in the EU and the UK, something the US market has had since the 1970s.

That said, European markets have introduced other innovations, including the creation of alternative trading mechanisms, according to Eleanor Beasley global head of equity market structure and chief operating officer for Goldman Sachs’ EMEA equities business.

“The UK and EU have successfully boosted market competition, giving global investors more places to trade than ever. Now, we must ensure everyone can see the total volume of these trades. This transparency will show that our markets are far more liquid than people realize, encouraging greater global investment in the region,” Beasley says.

For the first time, global investors will have an authoritative, single point of reference for stock prices and volumes across Europe.

How will Europe’s consolidated tapes help investors?

Without one reliable source of truth for prices, investors cannot be confident they are buying or selling at the best price, and they risk overlooking just how much liquidity Europe’s markets really offer.

The EU consolidated tape will be free for retail investors, Beasley explains, allowing anyone using investment apps to see the same basic information about stocks that large financial institutions have.

“We will be able to syndicate out awareness of what’s happening in the market across prices and volumes and not just leave it for those who pay for direct market data feeds from every trading venue,” Beasley says.

Piecing together an accurate picture of trading volumes across Europe can be a struggle, even for stock market professionals. A report by the New Financial think tank in partnership with Goldman Sachs found that less than a third of all trading volume in the region can be found on the public order books of stock exchanges (“Lit primary venues” in the chart below).

Despite this, the contribution of lit primary venues to addressable volumes (liquidity that traders can actually interact with) remains robust. But for investors to get a true picture of available liquidity, they need to look at all trading mechanisms, including off-book trading, which contributes 40% of addressable liquidity.

This is a challenge for Europe. If global investors only look at what is traded on European lit primary venues, they may think Europe’s stock market is less active than it really is, particularly as it competes with other market centres like the US.

“A misunderstanding of Europe’s total trading activity is affecting how investors allocate their money, how big their orders are, and how they manage risk in the region,” Beasley explains. “If you’re only seeing a fraction of the trading that is actually taking place, you’re going to undersize the activity that you’re doing in Europe.”

The consolidated tapes could also make market data cheaper to access, lowering the cost of doing business in Europe for all market participants.

Will the consolidated tapes mean more IPOs in Europe?

The consolidated tapes could also help European companies by making it easier to raise money from investors, according to Bertie Whitehead, head of Corporate Broking at Goldman Sachs.

This is because international investors are less likely to commit money to European companies if they only have a limited view of the liquidity—a key risk metric for portfolio management—across the region.

Investors, like pension funds and asset managers, have liquidity thresholds dictating how much capital they can allocate to a region depending on the level of liquidity. Investors who underestimate trading volumes across Europe may bypass investments to the region.

Whitehead says he has been advising clients in Europe to include in their investor relations deck the volume of their shares that are traded on an average daily basis to show that they are sufficiently liquid. “That’s an important element of their investment case,” he says.

A single record of liquidity across the region would help companies demonstrate to global investors that their stocks are more liquid than they might appear based on the trading activity on stock exchanges alone.

This, in turn, could help encourage companies to use Europe’s capital markets when they need to raise money. One of the attractions of US exchanges for foreign companies is the appearance of having significantly more liquidity than their European or UK counterparts. “That’s just based on wrong data,” Whitehead says.

In fact, when you compare liquidity in Europe and the US after excluding shares that are not available for public trading, the levels are comparable, Whitehead says. “Global market capital is like air: It flows everywhere.” Seen that way, he adds “the lure to the States isn’t quite as spectacular as you might imagine.”

Addressing the misconception that Europe suffers from a lack of liquidity could have two important consequences, Whitehead adds: The number of companies who are tempted to move their listings from Europe to the US may be lower, and private investors could see Europe as a more attractive venue for taking their portfolio companies public.

“I think the consolidated tape will improve the relative attraction of the EU and the UK versus the US. But there will still be many instances where the US will be the right and natural home for companies to list,” Whitehead says.

Beasley agrees that the consolidated tape will not be a silver bullet for Europe’s stock markets: other structural changes that policymakers and regulators are considering would also give the region a boost, including increasing retail participation, reforming pensions, and removing taxes on trading stocks. “All of those things combined will, I hope, create some positive momentum for the region.”

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