Recent reports of stock exchange turnover in European exchange-traded products reveal a strong uptrend.

In Germany, the Frankfurt exchange’s XTF segment recently reported record monthly on-exchange turnover of €20.3 billion for May, around double the level of a year earlier (see the chart below).

The London Stock Exchange reported May 2010 turnover across all exchange-traded products (ETFs, ETCs and ETNs) of £11.8 billion, a 59% increase on the previous month and a 114% increase on trading volumes of a year earlier.

NYSE Euronext has reported a 37% year-on-year increase in the average number of daily trades and a 36% rise in daily average turnover in ETFs over the same period. Europe-wide, Deutsche Bank calculates that average on-exchange ETF turnover has risen by more than half from the levels of a year ago.

Part of the increase can be attributed to a rise in the number of European exchange-traded products, of course. According to Deutsche Bank’s 24 June Weekly Market Review, there have been 273 new exchange-traded product listings so far in 2010, taking the European ETP total from 1090 to 1363. When measured in terms of assets under management, there has been a smaller, 16% rise, from €170 billion at the end of 2009 to €198 billion as at 18 June.

All the same, the rate of increase in exchange-based trading volumes suggests that a more fundamental shift is occurring in the ETF secondary market. Could trading “on-screen” – as exchange-based trading is commonly described, as opposed to trading “over-the-counter” or “OTC” – finally be taking off in Europe, in the same way as it did in the US ETF market?

According to Laurent Kssis, head of ETF sales trading at market maker LaBranche, there are two main reasons for the recent increase in on-exchange trading volumes. “First, ETF issuers have been pushing hard to try to convince their investor end-users that the future of trading is on-exchange, as in the US. This trend helps issuers build their businesses, of course, as higher trading volumes on stock exchanges help to promote ETFs in general. In certain markets, investors also feel that they can get better pricing by trading on exchange. We don’t necessarily agree with this, by the way. Second, there’s been a clear increase in retail involvement in the ETF market. Retail investor orders will be traded on-exchange, by definition.”

Kssis elaborated on what he saw as the potential pitfalls of on-screen trading.

“Who would want to put an order to buy or sell 200,000 shares in an emerging markets equity ETF on screen? You’d be guaranteed to move the market against you. So although investors often say that they’d like to see all ETF trading take place on-exchange, in practice many of them do trade OTC, especially when they have a large order to execute.”

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