Tradeweb to Launch European ETF “Trading Hub” with “RFP” model

Courtesy of IndexUniverse.eu Rebecca Hampson

The electronic trading platform for exchange-traded funds launched at the end of last month by electronic market place provider, Tradeweb, has been backed by ETF issuer, Source who says that it will create a central hub of liquidity in Europe, which the market currently lacks.

Michael-John Lytle, managing director at ETF issuer Source, told IndexUniverse.eu: “In Europe, US$3bn of ETF trades take place on-exchange daily.  This is much less than in the US where, on average, US$50bn is traded. This move has the potential to expose the other two thirds of European market flows which trade over-the-counter (OTC). Transparency can in turn encourage further liquidity and this is vital to a thriving and growing ETF market. Hence, it is a very exciting development.”

He said: “Liquidity in the European ETF market is very fragmented and this platform has the potential to capture a meaningful portion of OTC liquidity in Europe.”

Tradweb’s platform will allows buy-side firms access to 5,000 European-listed ETFs’ prices on request. Because of the transparent nature of the platform it is hoped that it will boost trading and encourage more market participants to join.

Lytle said: “The platform will facilitate large trades that would be challenging to execute on-exchange.  These OTC transactions are currently executed over the phone.  This platform will allow an investor to simultaneously collect prices from up to five market makers.  If it is successful, this will be a big step forward for the European ETF market.”

“Tradeweb already has 11 ETF market makers on board and a couple of dozen clients. It also has a tried and tested technology platform used widely in fixed income. Concentrating flows in one venue has the potential to centralise and expose a meaningful amount of OTC activity.”

Noted former major exchange specialist and now industry consultant Jay Berkman of JLC Group, who was also a co-founder of BondNet, the electronic trading platform for corporate bonds introduced prior to when Tradeweb first launched in the late 1990’s, “Employing fixed-income type price discovery tools for ETFs such as “price on request” is certainly an interesting angle, but the fact is, ETFs don’t trade like bonds, particularly when the underlying benchmark used by market-makers and liquidity providers for hedging purposes is actually comprised of multiple components.”

Added Berkman, “Any e-trading platform that requires multiple mouse clicks in effort to first source block liquidity, wait for responses for bids and offers, and then execute a transaction needs to be populated at the outset with credible and actionable liquidity, otherwise I’m still much better off relying on the new hybrid “high-touch/high-tech liquidity aggregators” who leverage technology and navigate the OTC market-maker ecosystem.”  

Lytle of ETF issuer Source says “Tradeweb already has 11 ETF market makers on board and a couple of dozen clients. It also has a tried and tested technology platform used widely in fixed income. Concentrating flows in one venue has the potential to centralise and expose a meaningful amount of OTC activity.”

Lytle argues that the option to continue voice broking means Tradeweb is unlikely to raise fees too high.

He said: “The current trading fees seem quite low. If they tried to raise them too much then it is likely those on the platform would simply revert back to voice trading, providing a natural counterbalance even after they reach critical mass.”

Adriano Pace, director of equity derivatives, at Tradeweb, previously told IndexUniverse.eu: “We brought the ETF platform to market on the back of demand from institutional investors for an electronic solution for larger size ETF trades, but at the same time it will help our clients meet the requirements of incoming regulation like MIFID II.  We feel that the timing of our launch is appropriate as many institutional clients already need to prove best execution when trading ETFs.”

Pace said: “We have over ten dealers supporting liquidity on the platform and we have made a strategic decision to make all European-listed ETFs available to clients. It is a fully disclosed request-for-quote platform, so the dealers included in each inquiry are aware of the identity of the client involved – there are no anonymous counterparties.”

Tradeweb is majority-owned by data and publishing firm Thomson Reuters, with a consortium of investment banks also owning shares. Source is owned by five investment banks.

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