How to Overcome Challenges of ETF Trading in Europe

Expert Webinar Series:

Panellists:

LISA PACKHAM Head of European Product Development Bloomberg Tradebook

RACHAEL REVESZ Senior Staff Writer ETF.com

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Overview

Institutions

Liquidity

Execution

Solutions

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CHALLENGES IN EUROPE

1. Institutional Adoption of ETFs

2. Fragmentation

3. Immature Securities Lending

4. Market Transparency

5. Liquidity

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Source: Deborah Fuhr, ETFGI.com

GLOBAL ETF & ETP GROWTH

EUROPE ETF GROWTH

8

Source: Greenwich Associates, 2014

WHO…

25% of European Institutions have

AUM in ETFs

7% of AUM in ETFs

Strategic and Tactical

22% expect to increase ETF usage

in the next 3 years

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Fragmentation

Source: BofAML, EuroCCP, Fidessa Fragulator data YTD 2015

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34% ?

40% 66%

100% ?

Europe US

RM

seen

OTC/Dark

Transparency

VOLUME vs.

LIQUIDITY

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LSE ETF CONCENTRATED NOTIONAL VOLUME

ADV

13

BUCKETING ETFs

ETF Notional Value # of ETFs

First 37 50% Notional Value 1

Next 87 Next 25%

of Notional Value 2

Remaining

1200 ETFs

Remaining 10%

of Notional Value

4

Next 157 Next 15%

of Notional Value 3

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US ETF CONCENTRATED VOLUME

AUM Box Size

Source: Bloomberg Financial L.P. FSRC<GO> , Bloomberg Tradebook

SPY

QQQQ

EEM

IWM

VWO

EFA

XLF

XLU

15 VOLUME CONCENTRATION

LIQUIDITY

ELEPHANT IN THE

ROOM

the

makes

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VOLUME vs. LIQUIDITY

Volume

EURO

NEXT XETRA

BORSA

ITALIA SIX

SWISS

OSLO

BATS

CHI-X

Statistical Arbitrage

liquidity provider

Market Maker

Authorized

Participant

(AP) LSE

(“Available”)

Liquidity

Source: Bloomberg Tradebook

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“AVAILABLE” LIQUIDITY

Available ETF Liquidity

Underlying Basket

ETF Exchange ADV

Related Derivatives

Correlated Trading

Vehicles

Source: David Abner, A Visual Guide to ETFs

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Execution

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STAZ<GO> STRATEGY ANALYSIS

12MM “available”

Avg 519k trade

Total size available for your order

Liquidity

Volume

“Manufactured”

Source: Bloomberg Tradebook STAZ<GO>

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LESS IMPACT

Order size

ETF-Adjusted algos

Source: Bloomberg Tradebook

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BLOCKS COST LESS

Order size

Source: Bloomberg Tradebook

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CHALLENGES TO BLOCK TRADING

Manual Process (Phone, Chat)

• Speed matters

• Lack of anonymity

Fragmented Market for Blocks

• Bank Delta One Desks

• Market-Makers

Measuring Cost

• Implicit Cost

• How do you improve?

Automation

• 1-click anonymous

access

Aggregation

• Multiple Competing

Liquidity Providers

Transparency

• Audit Trail and TCA

SOLUTION

SOLUTION

SOLUTION

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TRADEBOOK’S RFQ

Block

Quantity Streaming

Actionable

Quotes

Source: Bloomberg Tradebook BMQ<GO>

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TRADEBOOK’S RFQ AUDIT TRAIL

Source: Bloomberg Tradebook

BEST EXECUTION: TIMESTAMPS MULTIPLE QUOTES PRICES vs INAV

25 25 PANEL DISCUSSION

• Encouraging

and managing

growth

• The “E” in

ETF is

misleading

• Liquidity

manufactured

• Direct Access to

Authorized

Participants

• Block execution

• Regulatory

Changes

12 September 2014

Capital Markets – An ETFs real Liquidity

May 2015

Traditional Securities

Have a limited amount of free float shares available

Liquidity is driven by demand/supply

Historical volumes and trading patterns are used to predict future trading patterns

Exchange Traded Products

Price and liquidity are dictated by the underlying securities not the ETP

Extremely limited “supply/demand” effect as the funds are open ended

Historical volume is only useful to show popularity not tradability

Explanation

ETFS Wheat trades $1.54m per day on average

However, the relevant measure of how much trading

can be done in the underlying contract

This trades over $1b per day on average - Ratio:-

ETC/Future = 0.14%

Many times over $1.54m ADV could be traded through

the ETC with minimal impact

Taking a conservative estimate of 10% of the average

underlying trading, this means that $113m can be

traded on the ETC without any significant price impact

CBOT Future

Ticker:- W A Comdty

Average Daily Volume:- $1,126m

ETFS Wheat

Ticker:- WEAT LN

Average Daily Volume:- $1.54m

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