Trading ETFs For Best Execution On & Off-Exchange

Transcription

1 Paul Amery, Moderator Editor, Journal of Indexes Europe, IndexUniverse.eu Trading ETFs For Best Execution On & Off-Exchange Matt Hougan, Moderator Global Head of Content, IndexUniverse Pedro Fernandes, Panelist European Head of ETPs, NYSE Euronext Nial Gilchrist, Panelist Senior ETF Trader, Susquehanna International Group Adriano Pace, Panelist Director, Tradeweb Sjoerd Rietberg, Panelist Head of Trading and COO, Flow Traders

2 Session Leaders Paul Amery Editor Journal of Indexes Europe IndexUniverse.eu Matt Hougan President ETF Analytics IndexUniverse

3 Panelists Pedro Fernandes Head of European ETPs NYSE Euronext Nial Gilchrist Senior ETF Trader Susquehanna International Group Adriano Pace Director Tradeweb Sjoerd Rietberg Head of Trading and COO Flow Traders

4 The ETF Trading Conundrum: 2013 European ETF assets: +23% European ETF trading volume: -35%

5 The ETF Trading Conundrum: 2013

6 Basics of ETF Liquidity

7 Myth 1: You Can t Trade An ETF With Less Than 100k Shares Of ADV

8 Myth 2: An ETF Is As Liquid As Its Underlying

9 How Big Trades Happen in Little ETFs Creation/Redemption Refresh What Goes into an ETF Spread? ETF Arbitrage Bands Best Execution

10 How an ETF Works ETFs, Inc.?

11 ETF Anatomy: Creation/Redemption Authorized Participant $2.5 million 100K Inc. $25 MSFT AAPL CSCO CAT IBM

12 ETF Anatomy: Creation/Redemption Authorized $25 Participant IBM ETFs, Inc. MSFT AAPL CAT CSCO

13 ETF Anatomy: Creation/Redemption Authorized Participant $25 ETFs, MSFT CSCO AAPL IBM CAT Inc.

14 Why Be an AP? $25 Authorized Participant

15 Why Be an AP? IBM MSFT AAPL CAT CSCO Authorized Participant $25

16 Different Approaches; Similar Result Physically Replicated In Specie Physically Replicated - Cash-Based Synthetic Replication In Specie Synthetic Replication Cash-Based

17 Spread What s In An ETF Bid/Ask Spread? Ask Price Market Maker P&L ETF Spread Underlying NAV Creation Costs Forex Hedging Costs Taxes Brokerage Fees Underlying Bid/Ask Brokerage Fees Taxes Forex Hedging Costs Redemption Fees Bid Price Market Maker P&L

18 The ETF Trading Conundrum Why are European ETF assets going up (+23%, 2012) & trading volumes going down (-35%, 2012)? Why are ETFs not ET? Who benefits from trading OTC? If ETFs intraday liquidity is valuable, why do so many European investors trade at NAV? How do you make the most of ETFs liquidity option? What can be done to boost liquidity? How should you trade an ETF?

19 NYSE Euronext s European ETF Pedro Fernandes Head of European ETPs NYSE Euronext Market

20 Much Potential for Structural Growth The European ETF market is 5-10 years behind the US in terms of size, *primarily due to: Fragmentation of European Market Local character of market infrastructure Legacy of national regulations National bias of investors Current Fund Distribution Model Product penetration highly limited to toptier investors Lack of Retail Investor Education Related to the current distribution model issues

21 Supply/Demand Irreconcilability Has caused OTC trading preference to become a vicious cycle: Because the main part of ETF trading does not occur on the lit market and there is a risk involved in displaying prices in such trading environment, parties are not incentivized to provide their best possible prices and market depth. Because the best possible prices and market depth are not available on the lit market, trading remains OTC Harms public price discovery and competitive pricing, thus resulting in deteriorated price formation (larger spreads, narrower market depth)

22 Multiple Changes Ahead These will have a large impact on the competitive landscape: Structural Changes Industry Changes Consolidation Regulation: Gradual establishment of a pan- European regulatory framework MIFID II: Pre- and post trade transparency obligations for small sizes Suitability tests for distrib. of complex UCITS Distribution Network: Exchanges networks grow beyond natural frontiers Fee-only vs. commission-based distribution model Post-trade Infrastructure: Target2-Securities (T2S) facilitating transnational realignment Alignment of settlement cycles Increased client awareness of performance, direct and indirect costs, and risks Increasing competition A few exchanges will capture the main activity

23 Furthering Growth and Development We envision that an ETF-oriented exchange striving to support industry growth should: Offer innovative, reliable and regulatory compliant solutions for price formation within lit and non-lit environment Connect the ETF community to provide unmatchable product offering and market quality for optimal investments Advocate for structural changes that foster industry growth prospects

24 Meeting Evolving Industry Needs For example: By providing solutions that prove a close fit with community development: Based on a model with a centralizing entity turning towards the fund for creation and redemption ETF NAV Trading Enabling market participants to access a solution for order execution at NAV on ETFs, streamlined from trading to Clearing & Settlement, within a regulated market environment Replicating funds trading characteristics while delivering efficiencies and scalability in each step of the trade cycle Potential solution for onexchange ETF Block Trading Replicating as closely as possible the model currently used by block trading participants while including for example: Central Clearing & Settlement Large distribution network Regulated, MiFID compliant framework with pre- and post trade transparency

25 Electronic OTC Trading of ETFs Adriano Pace Director Tradeweb

26 The Role Of The OTC Market It s estimated that the OTC market represents up to ¾ of overall volume Why is it so big? It s easier to execute larger trades OTC Facilitates liquidity in fragmented markets buy-side can trade directly with a market maker There is a role for both OTC and on-exchange trading Client preference depending on nature of order

27 The Tradeweb Platform Electronic OTC trading of all European-listed ETFs/ETCs Equity Fixed income Commodities Liquidity available from 16 dealers (with several more in the pipeline) Fully disclosed counterparties Multi-dealer, request-for-quote (RFQ) protocol Liquidity Providers Include: Bank of America Merrill Lynch Barclays BNP Paribas Citi Commerzbank Deutsche Bank Flow Traders Goldman Sachs Jane Street Morgan Stanley Nomura Societe Generale UBS

28 Features Buy-side requests quotes in full size from up to 5 dealers Risk or closing NAV Request-for-market or single direction Prices are efficiently collated on one screen Efficient post trade Audit trails of all requests and trades (supports best execution reporting) Integration / straight-through-processing (reduces errors and settlement problems)

29 Screenshots Select up to 5 dealers Risk or closing NAV Look up any European-listed ETF/ETC Full description of ETF RFM or single direction Negotiation Ticket Compare all dealer quotes on one screen (best prices highlighted in green)

30 Execution Strategy & ETFs Sjoerd Rietberg Head of Trading and COO Flow Traders

31 Best Execution in ETFs, an example The prices you see on screen depend on: The underlying market and its volatility Competition and natural flow in the product Costs (creation & redemption, tax, transaction) Obtaining the best execution price for your order depends on: Choice of execution: OTC, broker, direct access Time Size

32 Example, May 22nd

33 Example, May 23rd

34 Conclusion for May 23rd During European opening: Risk transfer was hard Lack of liquidity Volatility was high Timing mattered a lot But: Markets got back to normal pretty rapidly

35 Live Trading

36 Panelists Pedro Fernandes Head of European ETPs NYSE Euronext Nial Gilchrist Senior ETF Trader Susquehanna International Group Adriano Pace Director Tradeweb Sjoerd Rietberg Head of Trading and COO Flow Traders