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Electronic ETF trading grows in strength in Europe


Despite reduced market volatility in February, total traded volume on the Tradeweb European-listed ETF platform amounted to EUR7.7bn in the month, the platform’s third best performance since launch, only beaten by last October’s EUR7.9bn and January’s record-breaking EUR10.7bn.

Adriano Pace (pictured), director of equity derivatives at Tradeweb, explains that the platform, which launched more than two years ago, now achieves a monthly trading activity of EUR8-10 billion in ETF notional volume. 

The over-the-counter (OTC) phenomenon for trading ETFs is almost exclusively driven by the structure of the European ETF market. Whereas in the US ETFs are readily available with deep pockets of liquidity on the key exchanges, across Europe the market is fragmented with many products denominated in more than one currency and listed across a number of exchanges.

Pace explains that the uptick in interest in OTC ETF trading in Europe across an electronic platform comes on the back of a general increase in appetite for ETFs, from the retail investor up to the institutional investor, because they offer liquid exposure to the underlying asset classes. 

The request for quote (RFQ) platform route is efficient for institutional investors. “With one click you get to buy entire markets” Pace says. “It’s much easier.” 

Across Europe there is also an overall trend of trying to harmonise European ETF market infrastructure and make it more consistent, which should mean tighter spreads and fewer settlement problems.

Another driver in favour of platform trading comes from the MiFID II legislation. While a large number of orders are currently struck on the phone, e mail or through chat, the new regulations will require an audit trail to prove that the best price was achieved for execution, which can be difficult in the heat of the moment on the phone.

Pace says: “It’s a growing business because firstly, the interest in trading in ETFs overall continues to grow, especially in fixed income, and secondly because our clients are moving to trading ETFs electronically generally.” 

Mitigation of operational risk is one of the most pressing concerns for institutional investors; this means ensuring that both the size and the direction (buy or sell) of each trade are correct. The electronic platform approach puts in extra safeguards, where the platform prevents the trader from slipping up. 

Pace argues that with the European ETF market focused on liquidity and efficiency, and the need to satisfy all aspects of what will be a more stringently regulated environment, electronic platforms can answer a number of its needs.

Larger trades can be carried out in an efficient and recorded manner: from price discovery, through execution, to processing and reporting. Pace says: “This will boost confidence in the depth of the market and improve perceptions of its liquidity. Addressing the issues of market fragmentation, restricted transparency and illiquidity perception should help the ETF market to achieve its potential in Europe – raising volumes and daily flow.

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