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Bloomberg reports fascinating insights into Europe’s record ETP trading year 

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Athanasios Psarofagis, Strategy Bloomberg Intelligence ETF Analyst, writes that European ETPs’ turnover exceeded EUR2 trillion for a third consecutive year in 2022, reaching a record EUR2.5 trillion amid volatile markets, but the products still represent only about 10 per cent of all trading. 

Rising off-exchange volume highlights the institutional nature of the market, though retail interest is starting to pick up, Psarofagis says.

Growing to 10 per cent of Europe’s market trading

ETP trading represents just 10 per cent of European volume, but that percentage is growing slowly, Psarofagis writes. In the US, wider adoption has boosted the products’ trading share to 30 per cent on average. He notes that ETPs benefit from tax advantages in the US, and trading is more concentrated than in Europe, supporting interest from retail investors.

Off-exchange ETP trading gaining market share

Request For Quote (RFQ) platforms have grown into the dominant mechanism for ETP trading in Europe, Bloomberg Intelligence says. RFQ services via multilateral trading facilities (MTFs) from Bloomberg and Tradeweb combined for about 50 per cent of total traded value in 2022. Their share jumped amid record trading, highlighting the institutional nature of Europe’s ETP market.

Germany’s ETP turnover last year topped the London Stock Exchange’s for the first time. 

Retail adoption slow but growing in Europe

Growth in MTF and RFQ platforms highlights that Europe’s ETP market is still largely a tool for larger institutional investors, according to the report. Hargreaves Lansdown, one of the UK’s biggest platforms for retail investors and advisers, said almost 10 per cent of its clients are using ETPs in some way — a small but growing percentage. Thematic ETPs can provide a gauge for retail use, with the category taking in EUR2.1 billion in 2022 even as performance trailed, says Psarofagis. 

Fragmented trading still liquid

Europe-listed ETPs’ trading volume reached EUR2.5 trillion in 2022, up almost 20 per cent from the previous year, due to increased volatility in both equity in fixed-income markets. This is a strong testament to ETPs, given they remained key sources of liquidity during the volatility, even as the complex structure of European markets kept trading fragmented across the region’s multiple exchanges. 

iShares has Europe’s deepest ETP liquidity pool

Psarofagis writes that BlackRock’s iShares accounts for the largest portion of Europe’s ETP trading, averaging 45 per cent of the total value and reaching as high as 50 per cent in recent months, well ahead of No. 2 Amundi. 

Issuers’ volume is generally in line with asset share, but WisdomTree, with its line-up of leveraged ETFs, tends to punch above its weight during volatile market periods, Psarofagis says, reporting that WisdomTree usually accounts for 2.5-3 per cent of monthly turnover yet approached 10 per cent in March 2020.

ETFs normally make up about 95 per cent of the value traded, while ETCs (exchange-traded commodities) average roughly 5 per cent. Equities average 66 per cent of the turnover and bond ETPs 25 per cent. 

Market structure drives Europe’s fragmented trading

European ETP trading remains fragmented in Europe partly owing to the region’s market structure, with its dozens of exchanges, clearing-houses and settlement depositories, as well as off-exchange platforms. Volume for ETPs has grown globally thanks to their ability to provide liquidity and allow easier trading of less liquid assets, such as bonds. Europe’s market has likely struggled to catch up with the US partly because of its complexity, rather than any concerns about ETPs. 

Liquidity buckets balanced across ETP tenures

ETP liquidity tends to skew toward older products, but the European market is more balanced than the US, with trading relatively fragmented, according to the report. In the more concentrated US, 80 per cent of industry turnover is in funds launched in 2008 or earlier, and products can form large liquidity moats that can be difficult for newer rivals to breach, Psarofagis writes. In Europe, trading share tends to be more aligned with the number of ETPs introduced in a given year. Liquidity still gravitates slightly toward older products, but trading in newer offerings rose in 2022, according to the report. 

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