Key findings from Swiss exchange SIX’s survey of Traders include the fact that 88 per cent of traders have seen a shift from active towards passive investing and 72 per cent expect the level of passive investing to rise further next year.
The exchange says that cost pressures and increased regulation continue to fuel the rise of passive investing. More than 85 per cent of traders expect a rise in passive investing could provoke change in global markets, but only 40 per cent see this development as positive for their companies.
Regulation, such as MiFID II, will be by far the biggest challenge in the next 12 months, the survey found. Trading activity in 2018 will mainly be driven by the actions of the ECB, while regulation is expected to have more influence than Brexit, the report says.
Traders said the main drivers of passive investing were cost-efficiency (44 per cent) followed by the looming introduction of the MiFID II regulation in January 2018 (31 per cent), while the trading environment (17 per cent) is not expected to strongly influence the balance between active and passive investing. However, traders raised concerns about the trend with 44% saying there was a risk to price formation from current levels of trading in passive strategies.
A major issue identified by 74 per cent of traders was the lack of liquidity in global markets. The fixed income sector stood out with 34 per cent citing liquidity issues, followed by the equities sector (26 per cent). Unsurprisingly, given the rise of passive investment, only 3 per cent saw a lack of liquidity in the ETF/ETP segments.
The biggest challenge facing traders in the next 12 months is regulation, highlighted by 73 per cent of respondents, far higher than the 55 per cent who named regulation as their top concern in the last survey of SIX in April 2017. The actions of the European Central Bank were named by 46 per cent of traders as being the most important factor driving trading activity next year followed by “MiFID III” (24 per cent), Trump (16 per cent) and Brexit (11 per cent).
Despite uncertainty in their world, the survey found that traders were more optimistic about employment prospects than in the last SIX Trader Survey. Some 61 per cent said their company would employ about the same or more people in three years’ time compared with 48 per cent last time.
Tony Shaw, Director London office, SIX Swiss Exchange, says: “Our survey results show the rise of passive investment is set to continue, but there are concerns about what this may mean for global markets. At the same time, there are plenty of other challenges for traders on the horizon – the biggest being regulation coming into effect in 2018.”