Tim Miller: Innovation in ETFs will result in elevated alternatives

How will progress within the ETF panorama impression buying and selling behaviours?

The speedy progress within the ETF business has been effectively documented and expectations recommend this can proceed – each in property and product varieties. Elevated ETF utilization amongst each institutional and retail buyers has led to some fascinating modifications in buying and selling conduct as sellers are in a position to reap the benefits of new liquidity sources and buying and selling infrastructure developments. Rising adoption of ETFs from the retail group, mixed with improved connectivity from platforms to exchanges creates alternatives for buy-side sellers to work together with these improved volumes on change, as skilled and retail volumes create a greater dynamic for orderbook buying and selling. Merchants now have extra optionality round how and when to commerce whether or not they require immediacy through request for quote (RFQ) platforms or working anonymously over an extended intra-day timeframe through devoted ETF execution algorithms. Mounted revenue ETFs have seen vital progress as buyers have been drawn to the liquidity advantages of the ETF wrapper versus the underlying bond markets. For many buy-side desks, all ETF buying and selling regardless of asset class is undertaken by equity-specialist merchants who’ve upskilled their understanding of the market forces and dynamics inside different asset courses.

What innovation are you seeing on this house?

The ETF business has been one among steady innovation and that is still the case at this time. On the product degree, we’re seeing an increase in energetic ETFs, which not solely provide extra selection for present ETF customers however ought to create alternatives for brand new buyers to take a position into ETFs and subsequently new buying and selling alternatives for buy-side desks. We’re additionally seeing options from the exchanges themselves resembling exchange-based RFQs that utilise straight-through processing (STP) protocols all through to settlement, which improves effectivity and in the end value within the buying and selling course of. Alongside these developments on the change degree, extra devoted ETF buying and selling algorithms have been launched which empowers sellers with the power to entry this wider vary of liquidity swimming pools at differing urgency settings which alter the child-order placement logic, usually inside fair-value frameworks. Lastly, there may be additionally innovation at RFQ platforms with the automation of ETF execution through trader-customisable guidelines that enable fast and environment friendly buying and selling of smaller tickets leaving the dealer to focus on orders the place they’ll add most worth.

How are merchants and market makers presently addressing liquidity fragmentation?

Merchants are more and more utilizing the broader vary of buying and selling choices inside their toolkit in addition to pushing for additional ETF algo expertise to carry collectively cross order guide liquidity on an ETF and different proxy property to offer liquidity on any single goal itemizing. Alongside this, buying and selling desks have been extra open to including new market makers to their risk-provision panels which results in better pricing competitors and in the end, improved buying and selling outcomes. Market makers continually search to enhance efficiencies inside their processes to raised utilise their stability sheets to supply tighter pricing and/or better liquidity. Market makers would additionally look to learn from any harmonisation of buying and selling venues and order books to carry their liquidity to a single level of execution. Moreover, making the post-trade fragmentation (central counterparty clearing and central securities depositories) extra streamlined would enable market makers to commit additional cash into the market, fairly than having it tied as much as fulfill post-trade provisions.

What new choices are being developed to boost liquidity and execution high quality?

Other than the developments talked about beforehand, there are strikes throughout the retail house to extend/enhance the power of platforms to supply extra ETF buying and selling to their purchasers. Expertise corporations want to assist platform suppliers streamline the ETF course of, decreasing complexity the place platforms might presently battle on account of legacy methods. There has additionally been a rise in ETF post-trade analytic capabilities for merchants – both developed inhouse and/or utilising third social gathering options that may provide detailed breakdowns of not solely every commerce itself however can present data on modifications of liquidity throughout the buying and selling course of resembling worth motion, reversion, or the widening of spreads. Lastly, an environment friendly and well-implemented consolidated tape might assist to finish the circle permitting better transparency on the pre- and post-trade degree producing better confidence in ETF buying and selling for all customers of ETFs.