Institutions are getting more comfortable with ETF liquidity and more sophisticated about measuring it, according to the second annual institutional ETF trading survey by global trading firm and liquidity provider Jane Street.
The survey, commissioned from risk.net which includes responses from 296 institutional investors, as well as qualitative interviews from 14 buy-side firms, reveals that they are trading ETFs more often and in larger sizes – and not just for passive management but for active management, hedging and liquidity management.
Traders are focusing on competitive pricing and execution capabilities when choosing counterparties. The survey found that institutional traders think ETFs are more liquid or just as liquid as they were three years ago, across all asset classes, including emerging market ETFs, fixed-income ETFs and developed market ETFs.
Competitive pricing is the most important criterion for selecting counterparties, with 55 per cent of institutions putting it in first place. Institutions value competitive pricing twice as much as any other criteria, including expertise in complex/illiquid markets (20 per cent), ability to trade in large size (16 per cent) and value-add services (9 per cent).
The size of the average ETF trade continues growing, with 24 per cent of global institutions reported executing a trade over USD100 million compared with 21 per cent in the year prior; in the more mature US/Americas market, 4 per cent of respondents had executed a trade in excess of USD1 billion.
Independent market-makers are gaining traction. Market-makers are the top choice of counterparty among buy-side institutions, experiencing an increase of 6 percentage points since 2017. The increased popularity of risk pricing may help to explain this change, the survey says.
Use of request‑for‑quote (RFQ) platforms is on the rise. More institutions are starting to use RFQ platforms, with adoption led by European traders.
In 2017, Jane Street, the firm that commissioned this survey, traded USD5.6 trillion across a range of financial products, including ETFs, equities, options, futures, currencies, commodities, and fixed income. Notable trading stats include USD1.7 trillion traded in ETFs, USD726 billion in bonds and fixed income ETFs, and USD13 billion daily in global equities.
In ETFs, Jane Street creates or redeems over USD1.5 billion per day and has over 35 per cent primary market share in international equity and fixed income ETFs listed in the US.
Commenting on the survey, Rory Tobin, Global Head of ETFs for State Street Global Advisors said: “At State Street SPDR ETFs we believe that growing confidence in the liquidity profile of ETFs is one of the main drivers for institutional investors’ increased adoption. As the ETF market grows we are seeing more ETFs develop scale in underlying fund size, leading to increased trading volume which results in tighter spreads and lower total cost of ownership for investors. As liquidity improves ETFs are being used as a Financial Instrument in their own right in preference to other Delta One instruments such as futures and swaps. Investors are benefitting from this increased ETF liquidity; this is particularly evident in fixed income where ETFs are sometimes trading at tighter spreads than could be achieved by trading the underlying basket of bonds, as identified in the Jane Street study.”
Further comment came from Axel Lomholt, Head of ETFs, International, Vanguard, who said: “An industry-wide focus on cost has been one of the major drivers behind the growing popularity of ETFs globally. More than half of the respondents of the Jane Street survey indicated that competitive pricing is the key factor in how they select their trading counterparties; this finding is very much in line with what we're hearing from our clients, who continue to emphasize the importance of the total cost of ownership.”
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