Market Making for Exchange Traded Funds Corporates & Markets
Commerzbank your trusted partner in the ETF market Since the start of the new millennium, exchange traded funds (ETFs) have experienced phenomenal growth in demand. Combining the liquidity of shares with the diversification benefits of pooled funds, ETFs have rapidly become the investment vehicle of choice for both institutional and private investors. Commerzbank is playing a key role in this fast-growing market. Through our powerful trading platform, we are helping to ensure the liquidity, access and efficient, low-cost trading that are key to successful ETF investing.
Contents ETFs the 21st century way to invest 04 Your benefits at a glance 05 Where liquidity meets stability 07 One-stop ETF trading for our clients 10 Commerzbank your global partner in Europe 11
04 ETFs the 21st century way to invest An unique combination of liquidity, flexibility and simplicity have made ETFs an essential tool for both professional and private investors worldwide. Invest in a fund, trade like a share Exchange traded funds are open-ended investment funds that can be traded on a stock exchange throughout the business day. To date, the vast majority of ETFs have been structured as passive funds, designed to replicate rather than outperform a particular market index s performance. ETFs have attracted massive popularity among both institutional and retail investors as a low-cost, liquid alternative to invest across a diverse range of markets, sectors and asset classes, including equities, commodities, bonds, currencies and credit. Over the last 11 years the number of ETFs in Europe has risen from 100 to more than 1,400 different funds (see chart below). The European ETF market registered record growth in 2014, growing by 26 percent, and assets under management in ETFs now amount to 363 billion euros. European ETF multi-year asset growth Assets bn 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Number of products 1,600 1,400 1,200 1,000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ETFs Equity ETFs Fixed Income ETFs Commodity Others Number of ETFs 0 Source: Deutsche Bank AG, as at 31.12.2014.
05 Features at a glance Simplicity ETFs allow investors to gain or reduce exposure to a whole market or asset class in a single transaction, making them highly suitable for both long-term as well as tactical investment asset allocation. Flexibility Whereas a conventional fund is only priced and traded at a fixed time each day, an ETF can be bought and sold at any time that the relevant exchange is open, including intra-day trading. Like shares, ETFs can be shorted to take advantage of falling prices, traded on a stop-loss or stop-limit basis to manage risk, or large trades can be time- or volume-weighted to reduce market impact. Liquidity The proliferation of ETFs has resulted in increased volumes on exchanges. Market Makers provide liquidity to the secondary market. The primary market ensures supply when demand is high. This makes ETFs appealing for gaining exposure to both developed markets and less liquid emerging markets. Market access ETFs offer exposure to a wide variety of asset classes, including equities, fixed income, commodities, money markets and currencies. Practically any index can be the basis for an ETF (either using physical or synthetic replication). Now, ETF managers are exploring the possibility of actively-managed ETFs too. Cost The Total Expense Ratio for ETFs tends to be low and there are no upfront or redemption fees in the secondary market. As with trading shares, investors usually incur a brokerage fee when buying and selling an ETF.
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07 Where liquidity meets stability We are committed to our role as a reliable Market Maker in both primary and secondary ETF markets. Why Commerzbank Global network of relationships with investors and leading ETF providers Long-standing experience of providing liquidity in both listed and OTC products Electronic trading platform support for over 150,000 listed products and funds Advisory teams to provide greater value to your investment decision-making Essential market-making strength Experienced, reliable Market Makers such as Commerzbank are crucial to the successful growth of the ETF industry and the ability of ETFs to be priced and traded throughout the business day. As a Market Maker, Commerzbank has two important roles in the ETF market: In the primary market, we operate as an Authorised Participant. This involves trading directly with the ETF provider in order to create or redeem fund units. In order to create ETF units, we deliver a basket of shares in the same weighting as the fund s index to the ETF provider and, in return, receive back units in the ETF. When shares are redeemed, the same process takes place in reverse. As ETFs are open-ended, the number of units in circulation increases and decreases in line with investor demand. Reliable Market Makers are therefore crucial to ensure a sufficient supply in times of high demand. The primary market is also used by large-scale investors who prefer to trade at the fund s Net Asset Value (NAV) to make sure they get an officially published price. Commerzbank s role in the ETF market The primary market The secondary market ETF Provider Commerzbank Authorised Participant and Designated Sponsor Exchange Investor
08 In the secondary market, we help ensure liquidity in ETF units so that investors can buy or sell their chosen ETF on a given exchange at any time during the trading day. This means, we are responsible for pricing ETFs throughout each trading day in line with the NAV of its underlying assets. To operate in the secondary market, Commerzbank has to be approved as a Designated Sponsor by the relevant exchange. To ensure a high quality service for investors, a Designated Sponsor has to give certain commitments, including: a stated maximum bid/offer spread a stated minimum size for quoted buy/sell volumes provision of prices on an ongoing basis As of April 2012, Commerzbank was approved as a Designated Sponsor on several major stock exchanges in Europe and since autumn 2012 in Hong Kong. Serving more diverse markets As ETFs venture into more diverse and potentially less liquid assets, Market Makers must be able to demonstrate that they can price and trade ETFs efficiently whatever the state of the underlying market. We believe this is why Commerzbank is increasingly the partner of choice for Europe s ETF market participants. OMX Stockholm Xetra Deutsche Börse Frankfurt London Stock Exchange NYSE Euronext Paris SIX Zurich Borsa Italiana Milan NYSE Euronext Lisbon
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10 One-stop ETF trading for our clients Long-standing experience, a robust trading platform and economies of scale have made Commerzbank the partner of choice for ETF participants across Europe. Advice on ETF strategy Order execution is only one element of our role as Market Maker. Our teams of product specialists also partner closely with clients to discuss how a particular ETF works and which product might be best suited to their needs or those of their own investment clients. We can also advise on the most appropriate ETF trading strategy, given a client s risk profile or investment objectives. 1 A leading Market Maker for European ETFs Covering a wide spectrum of ETFs across multiple European exchanges, we aim to be the one-stop shop for ETF trading for institutional investors. Robust trading platform Our strength in the ETF market is driven by our trading platform. Developed over almost 20 years by proprietary technology teams, the platform delivers: both on-exchange and over-the-counter (OTC) trades for institutional and retail clients consistently tight spreads and intra-day liquidity on more than 150,000 products, including ETFs, notes, certificates, shares and mutual funds proven liquidity and stable pricing even during times of extreme market volatility, i.e. through recent financial, geo-political and natural events that caused major market dislocation Economies of scale By combining trades for all products and funds on a single platform, our clients benefit from substantial economies of scale. For example, by pooling all trades into a single system, we can net trades off against each other and therefore offer the potential for reduced transaction and hedging costs. We continue to invest extensively in our ETF trading capabilities to ensure we offer one of the most efficient and reliable platforms in the sector. 1 Advisory services not available from and into UK or Asian countries.
11 Commerzbank your global partner in Europe Proven expertise in exchange-traded products. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, the second-largest bank in Germany. For over two decades we have been one of Europe s most active participants in creating, managing and providing liquidity in innovative investment solutions, including notes, funds, certificates, warrants and exchange-traded products as well as a leading exponent of index construction. Today, we offer our investment partners an extensive amount of experience in providing pricing, liquidity and stable connectivity in all market conditions and for an ever-increasing range of markets and asset classes. To learn more, email the ETF Sales Trading team at ETFMarketMaking@commerzbank.com or visit us on www.etf.commerzbank.com or call us: Frankfurt: +49 69 136 22088 Hong Kong: +852 3988 0801 London: +44 20 7475 1759
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