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Electronic trading roots lead to modern day efficiencies


New York City’s Nasdaq exchange launched in 1971, bringing electronic trading to the world, and there are some old photos on their website of what HiTech looked like, back when HiFi was a new thing and WiFi was a long way off in the future.

Steve Oh, Head of ETF Listings and Business Development at Nasdaq, explains that the first ETF listing on the exchange was in 2002 and the business has grown as the adoption of ETFs has increased, having seen particular acceleration through the GFC. There are now approximately 400 listed ETFs on the platform across across 32 issuers, with total assets under management of over USD500 billion.

“When you think about the traditional role of an ETF listings exchange, we were ubiquitous five years back,” Oh says, “and over the last five years our role has changed and developed where Nasdaq is becoming more of a partner, offering value added with ETF providers.”

Having that electronic trading origin, Nasdaq prides itself on its technology. “What we view as the Nasdaq value proposition is that we like to think we have the best in class execution platform which powers over 100 global exchanges,” Oh says. “Our clients trust our business and our best in class matching engine which means that issuers trust that our technology is able to provide investors with liquidity.”
Oh says that Nasdaq’s global recognition as ‘techy and innovative’ means that issuers on the exchange are associated with that. “If you associate your product and brand with us, you have an association for being at the cutting edge of the ETF industry,” he says.
The exchange also leverages on that association through marketing initiatives, thought leadership and content from the Nasdaq Tower to webinars or conferences. “As an SRO regulated entity, we have a place to promote investor education and engage with the regulators in supporting ETF education. We make it an important point to talk to different parts of the ETF ecosystem to help with education.”

Later this month, Nasdaq will partner with the CFA Society of New York for Synapse 2019, an ETF educational conference designed to bring together the leading minds in the ETF industry.
The biggest ETF on Nasdaq is Invesco’s QQQ, based on the Nasdaq 100 index which is one of the largest ETFs in the world on assets and average daily trading volume.
“We have very successful core large type passive strategies from all the major ETF issuers in the US,” Oh says. “Other areas where we have been successful have been around thematic type strategies such as robotics, AI or internet-based retail. Other areas such as smart beta and ESG-themed ETFs have also picked up traction.”

Oh says that the exchange has also focused on ways to help enhance marketmakers’ ability to trade in the new and more thinly traded ETFs, so-called Zombie ETFs that are not trading very actively.
“We have seen that these ETFs need assistance and we have projects in the pipeline to help support liquidity in these thinly traded ETFs around figuring out what kind of potential market making incentive plans and market structure improvements we can put in place and facilitate,” he says.

Nasdaq has also worked on the latest changes in the regulatory space. “Two of the largest developments in the ETF industry are the regulatory approval for Precidian to launch non transparent ETFs and the ETF rule,” he says.
While the first ETFs under the Precidian platform will probably not list on Nasdaq, the exchange is going to support the listing and co-ordinate with the ETF ecosystem in supporting the launch of these types of ETFs.
“There’s a lot of demand so I am optimistic about this space,” Oh says. “There is a lot of interest and work going on in the industry to support these products. There is a lot of interest from investors who want to have active strategies but with the benefits of the lower cost and tax efficient ETF structure. The ETF is a viable alternative to an active mutual fund.”
The ETF Rule, the 6c-11 rule, is arguably bigger news again. Its origins lie in the fact the ETFs were essentially a hybrid vehicle that trades like an equity but is also a fund. The new rule enables issuers to come to market more easily, without having to gain exemptions, which will save time and cost.
“When the SEC came out for comments, Nasdaq wrote a comment letter and was supportive of the ETF Rule, giving commentary on areas we felt could be enhanced. With the effective date in December, we, along with other ETF-listing exchanges, are working with the SEC to amend our listings rules to meet provisions within the rule.
“When the rule becomes effective, clients can rely us on being ready and as a result of the new efficiencies. We think there will be an uptick in the amount of new entrants and new products as well,” Oh says.
“I believe there will continue to be a boom but the number of ETF de-listings has increased as well, as the ETF industry has started to mature and make room and resources for new ideas to come to market.”

Looking forward, Oh believes that fixed income ETFs are particularly well placed to grow with the custom basket provision under the ETF Rule. It makes custom creation/redemption baskets available for all of the ETFs it covers, allowing for potential tax benefits for companies that issue ETFs and for investors to better understand transaction costs within the funds.
Oh believes this will offer the biggest efficiency to fixed income providers and enable market makers to better support liquidity in the sector.

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