Nasdaq OMX considers future of fund trading

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Demand is growing for easier daily trading in shares of mutual funds in the Nordics, with suggestions that the Danish model could yet prevail, according to comments from Lauri Rosendahl, senior vice president of Nordic Equities and Equity Derivatives at Nasdaq OMX.

Rosendahl notes that from the perspective of his firm – which operates Nordic exchanges including the IFX that offers daily real time trading of listed Danish investment associations – it is clear that investor demand is increasing for easier and more transparent ways to access trading in funds. Currently this demand is being led by the growth in the region’s ETF market.

Historically, the region’s big banks were not big providers of ETFs, which has meant that global players have been keen to push into the region.

Characterising market developments as fast moving, Rosendahl notes that investors are now starting to move into new generation ETFs, such as active managed ETFs and other products offering new features.

Nasdaq OMX has been working with the providers, for example, to build guidelines on how to maximise transparency, and in the area of trading looking at how to ensure daily trading and narrow spreads.

Taken together, the various developments have seen the emergence of a “good mix” of international issuers such as Deutsche Bank competing alongside local banks.

This competition is being heightened by the need to improve margins, which is why providers of ETFs are keen to encourage new products, such as factor based funds, on which they may be able to charge  more.

For the bigger ETF providers facing the prospect of competing on the most commoditised funds, there is a need for business development, to seek out more specialised products with better margins.

“There’s a bit of a price war,” Rosendahl says.

Peculiarities

The Nordic ETF market is also impacted by currency. For example, Swedish investors have asked for SEK denominated products that mirror original strategies denominated in euros.

Having dealt with this current currency challenge, the banks that Rosendahl talks to are now starting to discuss the next big strategic play, which involves developments in the area of trading and transactions. This thinking is not just about ETFs, however, but also encompasses what could be the future of open ended mutual fund trading.

“More banks think that the long term trend for investors is that they not only want to invest in collective investments, but they want to trade them as they trade single stocks – in real time, every day, on an exchange, in a lit or dark order book.”

“That would be a simpler way to trade everything, compared to the current way of trading shares in collective investments,” he adds.

No doubt, there are challenges to overcome to make this possible. Rosendahl notes the issue of how to ensure active management alongside daily trading. This is the type of technical aspect that Nasdaq OMX is investigating together with fund providers, he says.

“It’s one of the future trends I really believe in,” he says.

Nordic markets still represent considerable opportunity for ETF providers, given the size of AUM already in traditional mutual funds, Rosendahl adds. The size of the biggest funds in, say, Sweden that are mandated to invest in Swedish equity means that they are finding it hard to avoid becoming closet trackers.

Rosendahl and his colleagues are also looking to the example of how domestic funds – investment associations – are traded daily in Denmark, and how this model could be used for other Nordic markets.

Looking at how capital markets have evolved historically, Rosendahl says that he expects a trend for funds to move towards the way equities are traded, citing scale benefits and other opportunities attached to being able invest in and out daily.

“I wouldn’t be surprised if other markets in Europe were to move toward this type of change some years from now,” he says.

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