The sustained growth levels of the exchange-traded fund (ETF) industry could be under threat due to a lack of a consolidated tape, according to several senior market participants.
Speaking at the ETFs Global Markets Roundtable in London this week, panellists agreed that with around 18,000 data points, a standardised consolidated tape is a “desperate need” for the industry.
“Currently, the level of visibility on trading volumes is the biggest obstacle to the growth of ETFs,” said Gregoire Blanc, head of capital markets at Lyxor ETFs. “It’s extremely difficult to locate and go through those data sets, and growth and price formation could be prevented from being fully unlocked as a result.”
Henry Reece, head of sales at Susquehanna International Group, added, “The lack of a consolidated tape is a major factor.
“We need this as a market maker to get to know the industry better and our buy-side or institutional clients. Staying on top of that is a real challenge,”
The panel also said that despite concerns having been raised around ETFs and liquidity, the product has stood up to the test of market volatility with very little impact to primary markets.
Jason Xavier, head of EMEA ETF capital markets at Franklin Templeton Investments, reiterated the importance of ETFs in times of market stress and agreed that the industry is in desperate need for a consolidated tape.
“When Brexit happened and we saw volatility, authorised participants (APs) and market makers stepped in and provided that liquidity. I am still yet to see a trade fail because nobody stepped in to provide liquidity,” Xavier said.
Furthermore, the introduction of MiFID II has been a positive for the industry with more transparency providing greater investor confidence. However, to offer clients comprehensive and useable data, regulators need to introduce a consolidated tape.
The panel also decided that exchanges need to do more to compete against the request-for -quote (RFQ) trading method. Reece told delegates that exchanges are important as they offer visible liquidity and they centrally clear transactions, although RFQs offer more comfort in knowing who you are trading with.
“RFQ is in a difficult position at the moment with best execution requirements and there is a greying distinction between RFQ and exchanges trying to win optimum flow,” he said.
“A large part of our business is over-the-counter (OTC) but we try to stay agnostic to preferences. Exchanges have to solve the issue of maintaining a bilateral agreement that the RFQ method offers.”