ETF trade reporting initiative tackles market liquidity

Unreported exchange-traded fund (ETF) trades are to be made transparent in an initiative to make the European industry more efficient.

Between 70-80% of ETF trades are settled over the counter (OTC) and about half goes unreported, but BATS Chi-X Europe, the largest pan-European equities exchange, is to allow traders to report all their ETF trades to its BXTR reporting engine from October 1, rather than to multiple national exchanges.

The initiative is intended to broaden the visibility of display volumes, reduce bid-ask spreads and increase liquidity. The problem of liquidity is seen as a hindrance to the European ETF market, which is a tenth the size of the US market where post-trade activity is more centralised.

John Keogh, managing director, Susquehanna International Securities, says: “Put simply, greater transparency of the prices and volumes traded will promote better liquidity. As more trading flows are directed to central limit order-books, bid-ask spreads should tighten and displayed volumes should increase. This should help to create a similar trading environment for European ETFs as that in the US, and so will fuel their growth as an investment vehicle. “

Trade data, made available through BATS market feeds, may be reported immediately or with a delay. The larger the trade, the longer the delay in line with the current regulatory reporting regime for EU securities. As with equities, trading participants will be encouraged to report within three minutes of execution.

The initiative takes place also as the European Securities and Markets Authority develops a reporting regime for ETFs under the Markets in Financial Instruments Directive II (MiFID II).

Leland Clemons, head of capital markets, including for Europe, at iShares says: “Though MiFID II will introduce a trade reporting regime for ETF trading, the implementation of this is still some distance away. We’re pleased to see that BATS is acting now to implement measures that will accelerate the creation of a more transparent, efficient marketplace, and we will continue to encourage reporting of all ETF trades in a timely manner.”

Michael John Lytle, chief development officer at Source ETF, highlighted the issue of OTC data and ETFs at a Funds Europe securities lending roundtable in November last year.

“There is an issue around transparency of transaction data,” he said. “Disclosure of OTC trades is important. The LSE [London Stock Exchange] requires this; some other exchanges don’t. An important step in Europe would be a move towards capturing OTC data across the board.”

For BATS Chi-X Europe, the initiative forms the latest part of its plan to be a major part of European ETF infrastructure. In June, it listed its first ETF that clears in one European location.

©2014 funds europe



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