Understanding ETF Liquidity and Trading Paul Amery, Moderator Editor www.indexuniverse.eu Lisa Dallmer, Panelist Executive Vice President Global Index and ETPs, NYSE Euronext Keshava Shastry, Panelist Head of Secondary Markets ishares Jan de Bolle, Panelist Head of Business Development Flow Traders B.V.
Index and Exchange Traded Products Lisa Dallmer Executive Vice President, Global Index and Exchange Traded Products
Market Model Overview ETFs may trade on several different types of trading venues: Listed exchange aka the Primary Exchange and a regulated market place Multilateral trading facilities (MTFs) which have unlisted trading activity (lighter regulation) Dark pools, which offer alternative liquidity aggregation venues without exposing the order to a public quote
Market Model Overview Exchange monitored and obligated performance produces a tangible and valued experience for investors. Lead Market Maker Program (LMM) exists for NYSE Arca in the U.S, while the Liquidity Provider Program (LP) exists for NYSE Euronext in Europe LMM Program: Exchange & Issuer arranges for a single LMM to support each allocation LP Program: Exchange & Issuer can arrange for multiple LPs to support each allocation
Market Model Overview Exchange monitored and obligated performance produces a tangible and valued experience for investors. LMMs and LPs aid the process of price discovery through providing publicly displayed quotes - Exchange monitored performance - Required to quote continuously at prices relevant to the ETF s underlying portfolio, thus reducing costs for investors looking for exposure to the basket (but find it too expensive to assemble themselves) - LMMs and LPs are also required to be part of the Opening and Closing auctions; a critical function in pricing marketable order flow - The indicative match price, indicative match volume and auction imbalance are all continuously calculated and disseminated allows for real time price discovery and transparency - Slippage for the closing auctions is minimal at 20 bps due to this model
Market Quality Comparison: US listed ETFs Relationship between low volume ETFs and ETFs with wider spreads has often been misrepresented Volumes are an indicator of activity, but spreads are an indicator of the ease of pricing and risk taking The implicit cost of quoting for LMMs is higher for international products than domestic, leading to wider spreads The LMM model on NYSE Arca produces tighter spreads & greater quoted depth than trading venues with no obligated LMM NYSE Arca Listed Domestic ETFs: First Half 2009 Source: Arcavision.com CADV Spread Depth Share Market Share Quintile NYSE Arca NASDAQ NYSE Arca NASDAQ NYSE Arca NASDAQ 1 0.05% 0.05% 21,252 20,543 26.60% 33.40% 2 0.13% 0.18% 1,891 1,984 28.60% 21.60% 3 0.25% 0.50% 2,428 2,101 35.00% 16.30% 4 0.58% 0.90% 1,889 1,455 37.60% 13.30% 5 0.42% 1.06% 1,989 1,438 45.30% 12.80% NYSE Arca Listed International & Non-U.S. Treasury/Agency Fixed Income: First Half 2009 CADV Spread Depth Share Market Share Quintile NYSE Arca NASDAQ NYSE Arca NASDAQ NYSE Arca NASDAQ 1 0.06% 0.08% 12,087 10,781 34.60% 22.40% 2 0.38% 2.16% 2,256 1,519 44.00% 6.90% 3 0.62% 3.77% 2,164 972 47.50% 4.80% 4 0.76% 4.95% 2,215 694 54.40% 5.30% 5 1.13% 7.05% 1,999 655 65.70% 4.90%
Market Quality Comparison: Europe listed ETFs The Exchange monitored LP model allows for tighter spreads and larger depth on NYSE Euronext Trading venue fragmentation has its search costs, a agency order cannot risk multiple fills and thus cannot be represented everywhere Interpretation of best execution varies, and the lack of forced interconnected markets results in non-protected quotes The number of LPs in Europe has increased, in part as a result of the new trading technology and faster data feeds Month BATS Chi-X Lyxor ETF Cac40 Spread (bps) Depth (euro per side) Volume (Euros) NYSE Euronext BATS Chi-X NYSE Euronext BATS Chi-X Source: Arcavision.com NYSE Euronext Jun-09 8.69 5.22 4.18 356,153 412,818 599,313 4,930,739 35,681,134 972,285,808 Jul-09 10.02 5.62 4.46 170,342 207,000 613,889 1,905,503 13,101,820 937,853,935 Aug-09 9.17 5.02 3.53 110,389 155,633 372,015 3,030,697 32,192,172 662,337,670 Month BAT S Lyxor ETF Euro Stoxx 50 Spread (bps) Depth (euro per side) Volume (Euros) Chi-X NYSE Euronext BATS Chi-X NYSE Euronext BATS Chi-X NYSE Euronext Jun-09 10.79 5.64 5.38 345,147 423,234 506,534 10,568,733 67,609,939 726,355,233 Jul-09 13.92 6.22 5.69 201,812 217,028 315,127 11,863,689 29,844,952 727,930,507 Aug-09 12.58 5.15 5.13 225,206 225,860 402,887 21,045,685 48,840,082 543,124,322
Legal Disclaimer Cautionary Note Regarding Forward-Looking Statements This presentation may contain forward-looking statements, including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements concerning NYSE Euronext s plans, objectives, expectations and intentions and other statements that are not historical or current facts. Forward-looking statements are based on NYSE Euronext s current expectations and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Factors that could cause NYSE Euronext s results to differ materially from current expectations include, but are not limited to: NYSE Euronext s ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk and U.S. and global competition, and other factors detailed in NYSE Euronext s reference document for 2008 ("document de référence") filed with the French Autorité des Marchés Financiers (Registered on April 28, 2009 under No. R. 09-031), 2009 Annual Report on Form 10-K and other periodic reports filed with the U.S. Securities and Exchange Commission or the French Autorité des Marchés Financiers. In addition, these statements are based on a number of assumptions that are subject to change. Accordingly, actual results may be materially higher or lower than those projected. The inclusion of such projections herein should not be regarded as a representation by NYSE Euronext that the projections will prove to be correct. This presentation speaks only as of this date. NYSE Euronext disclaims any duty to update the information herein.
Secondary Market Trends Keshava Shastry Head of Secondary Markets ishares
2007 vs 2008 vs 2009 - All recorded volumes 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000-2007 2008 2009 $ Mio 2009 USD volume > 35% increase YoY
European ETF providers by secondary market volume 2009 secondary market trading volumes ETF Securities 5% Xact 6% Others 12% ishares 36% Family Weight (%) ishares 36.73% Lyxor 21.05% db x-trackers 20.18% Xact 5.62% db x-trackers 20% ETF Securities 4.53% Others 11.88% Lyxor 21% Source: Blackrock, Bloomberg, Deutsche Boerse as at 31 December 2009
Equity, Futures Turnover sharply down European equity and futures turnover ( m) 2,000.0 1,800.0 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 STOXX 600 Turnover EURO STOXX 50 futures Notional Source: Bloomberg, BlackRock
ETP Market Share Growth Continues European ETP market share 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Source: Bloomberg, BlackRock ETF Turnover as % of market turnover
Market Trends Volumes and Spreads in ishares MSCI Emerging Markets fund (Amsterdam listing) $900,000,000 70 $800,000,000 60 $700,000,000 $600,000,000 50 $500,000,000 40 $400,000,000 30 $300,000,000 20 $200,000,000 $100,000,000 10 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 0 ADV Spread (Euronext Line - bps) Source: Bloomberg, One Tick
Secondary market efficiencies ishares FTSE 100 LSE Spreads Basis points 25 20 15 10 5 0 Jul-08 Aug-08 Sep-08 Nov-08 Dec-08 Feb-09 Mar-09 Apr-09 Jun-09 Jul-09 Source: Bloomberg, BlackRock, Citigroup ETF Underlying
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Managing Liquidity Jan De Bolle Head Business Development Flow Traders BV
Managing liquidity is increasingly complicated Eurostoxx 50 listings in Europe
Managing liquidity is increasingly complicated - ETF market is often bigger than the futures market - Inventory Management: inefficient post-trade infrastructure - Borrowing & Lending market is hard to access - Exchange Membership: ongoing effort - The need for speed: hardware & software - The efficient frontier?
Contact details Jan De Bolle Tel. +31207996772 Mob. + 31 6 11878981 jdb@flowtraders.com
Understanding ETF Liquidity and Trading Paul Amery, Moderator Editor www.indexuniverse.eu Lisa Dallmer, Panelist Executive Vice President Global Index and ETPs, NYSE Euronext Keshava Shastry, Panelist Head of Secondary Markets ishares Jan de Bolle, Panelist Head of Business Development Flow Traders B.V.