The consolidated tape’s blind spot

In the US the consolidated tape aggregates trade data across multiple exchanges. However, the consolidated tape does not include trades for less than 100 shares of stock. Looking at this today, it is surprising that such an exception was implemented. In the past such small trades were regarded as retail trades with very little information content, thus they were perhaps not considered worth collecting.

But with the introduction and continued growth of algorithmic trading, the trade size dropped significantly and keeps on dropping! According to the Fragulator, the average trade size in the Dow Jones Industrial Index across lit venues in July 2012 was only 315 shares. A recent study by O’Hara et al (2012) investigates this point on a data sample of 120 stocks provided by NASDAQ and compares them with the consolidated tape. The research finds that the median number of missing trades (below 100 shares) per stock is 19%, but for some stocks missing trades are as high as 66% of total transactions! Missing trades are more pervasive for stocks with higher prices, lower liquidity, higher levels of information asymmetry and when volatility is low.

Furthermore, the authors argue that about 2.5 million subscribers to the consolidated tape could be missing a significant part of the market. Trading participants can rectify the problem by purchasing additional data feeds from the exchanges to get the full picture, but this comes at a higher cost.

The lesson learnt for Europe is that any regulation should not be too prescriptive. Even if some regulation was fitting at the time it was made, markets can change rapidly and make any rule sub-optimal today.

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