What’s more, the proliferation of ETF listings is making it harder for liquidity providers to offer competitive price quotes across the region, given that each listing imposes an obligation on market makers to quote two-way prices, eating up valuable capital, according to Michael Barmettler and Jan de Bolle of Flow Traders, an Amsterdam-based ETF market maker.
“Why do we need 55 separate European listings of ETFs tracking the same Euro Stoxx 50 index?” de Bolle asked.
Also, assets under management are highly concentrated among the top three ETF providers (iShares, Lyxor and db x-trackers), who jointly control around three quarters of the whole European ETF market. That means that more marginal ETF issuers are likely to shut down or merge, said Barmettler.
An ETF Bubble?
“Could there even be an ETF bubble?” some conference attendees asked, reacting to clear indications that the use of exchange-traded products is expanding rapidly in Europe, regulatory and structural impediments notwithstanding. ETP use has increased five-fold in the past five years.
Probably not, Daniel Donovan of Salix Capital argued during a panel discussion on “Sourcing Off-Exchange Liquidity.” ETFs are merely tools to access underlying market exposure, so there will only be a bubble if there’s a bubble in an asset class particular ETFs are designed to access, Donovan said.
However, ETF providers need to keep in mind that their products should be scalable – that is, capable of growing without capacity constraints, said Matthew Holden of Knight Capital, speaking on the same panel.
This applies both to the underlying index being tracked and the replication method used, Holden said. He cited concerns that issuers of some swap-based ETFs had faced difficulties providing efficient index-tracking to their funds during 2008 as a result of balance-sheet constraints at the parent banks. Swap-based ETFs depend on a bank, often the parent bank of the ETF issuer, to guarantee the index return to the fund.
Overall, however, Holden was bullish about the prospects for ETF trading activity.
“We're on the verge of an explosion of volume in ETF trading in Europe," he said.
The presentations used during the conference sessions can be accessed via the following links: