ETF trades increasingly move to on-exchange trading

The ability to trade ETFs on-exchange is becoming increasingly important, says the London Stock Exchange’s head of ETFs.

“London has traditionally had a lot of activity off exchange. Recently the situation is changing; talking to asset managers and players in the industry it is an important value to bring the ticket on exchange because we are a regulated market,” says Pietro Poletto, head of ETF and fixed income markets at the LSE.

He says that for the market makers on-exchange trading will help them to generate business because the exchanges are governed by rules which are recognised throughout the market. For the asset managers, having a ticket on screen and a central counterparty is important for compliance reasons, he adds.

Last month, Cowen (formerly LaBranche) started to offer trades on exchange after pressure from the ETF industry to provide trading transactions on screen.

The high volume of off-exchange trades in the European market (around 60%) has been cited as the reason for a seeming lack of liquidity in the market; at present there are no rules requiring over-the-counter trades to be reported. The fragmentation of trading across multiple venues has also been criticised.

Poletto says he believes there will be consolidation of trading venues within the European market. “Talking with the issuers and the market participants the fragmentation will be reduced and in the future there will remain three to four [exchanges], no more.”

The LSE merged with the Borsa Italiana in 2007 and there is talk of further consolidations with the Deutsche Bӧrse and Euronext planning a merger. However, others in the industry argue that investors will always want to buy in their local market.

 

A version of this article first appeared on ETFM.

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