European exchange-traded fund issuers have welcomed a new service from Deutsche Börse which aims to make it easier to trade large ETF orders on the German exchange.
Deutsche Börse has launched Xetra Quote Request which allows investors to send quote requests for large orders to all registered market makers of a selected ETF, rather than having to negotiate ETF transactions bilaterally over-the-counter or through request-for-quote systems.
The market makers respond by updating their quotes in the Xetra order book, Deutsche Börse’s electronic trading platform. Investors can generally receive a response within 120 seconds of the submission of a quote request although less liquid funds may require more time than highly liquid products according to the exchange.
The process is designed to achieve a high degree of automation with straight-through processing, clearing and settlement, which reduces operational and counterparty risks, while ensuring compliance with best execution requirements for large orders.
Deutsche Börse said in a statement: “Investors therefore benefit from a potential price improvement over execution against a single market maker quote, and ensure best execution by simultaneously interacting with the full liquidity available in the order book.”
Townsend Lansing, head of exchange-traded commodities at European issuer ETF Securities, said in an email to Markets Media that the new service increases efficiency and transparency. “Unlike the traditional RFQ infrastructure, the new system opens up quote requests to a much wider and more complete universe of all the designated sponsors of a given ETF,” Lansing added.
He continued there are possible concerns about information leakage and market impact but expects competition between market makers to win business will reduce any potential adverse impact.
Jürgen Blumberg, head of European capital markets at Source, told Markets Media that the European ETF issuer very much liked the Deutsche Börse initiative. “In Europe approximately 70% of ETF volume is traded over-the-counter and liquidity is invisible. If there is more visibility then ETFs will be even more widely used,” he added.
Lansing agreed that the European market will benefit from more on-exchange trading.
“A number of ETP issuers (including us) have long recommended the creation of a consolidated tape (a comprehensive record of both on-exchange and OTC trades),” Lansing added. “Given that that is still in process, more trading on-exchange will go a long way to promoting greater liquidity, price discovery and transparency.”
MiFID II is due to introduce mandatory reporting for ETFs but the new regulations covering European financial markets have been delayed by one year to 2018.
Lansing said there is evidence of more voluntary ETF reporting ahead of MiFID II. “Issuers generally encourage this and a number of independent market makers are increasingly looking to report trades to illustrate their high levels of activity,” he added.
Xetra Quote Request will initially cover approximately 500 ETFs, out of more than 1,400 listed on the German exchange. The service is supported by European ETF market makers, including Goldenberg Hehmeyer, Susquehanna International Securities and UniCredit Bank.
Blumberg said that although three market makers are currently involved, for many ETF listings there will be only one sponsor.
“The initiative is a good start and we hope there will be more market makers and that other exchanges will follow suit,” Blumberg added.
In the first quarter of this year assets invested in ETFs listed in Europe reached a record $522bn (€467bn) according to preliminary data from consultancy ETFGI’s industry insights report. Year-to-date net inflows into commodity ETFs have been record $4.49bn, overtaking the previous high of $2.01bn in the first quarter of 2012.
iShares gathered the largest net European ETF inflows in the first three months of this year of $6.11bn, followed by ETF Securities with $2.11bn and then State Streets’s SPDR ETFs with $856m.
Jane Sloan, head of iShares capital markets EMEA at BlackRock, said in a statement: “In 2015, we saw almost €100bn worth of iShares ETFs being traded on the Deutsche Börse. Xetra Quote Request is another example of industry innovation that will bring greater transparency and liquidity to ETF markets.”
Featured image by Comugnero Silvana/Dollar Photo Club
