IU.eu: What’s the thinking behind the new single-order book process at NYSE Euronext, and how might it affect ETFs? What feedback have you had?
Dallmer: For issuers the new process will commingle liquidity pools. An issuer may have the same ETF listed on three or four different NYSE Euronext exchanges, and we found that there were distinct liquidity pools, which didn’t necessarily interact with each other. For an investor this will mean that there’s a higher probability of accessing liquidity pools that they weren’t aware of before. We think that both issuers and investors are happy with the new system. To the extent that investors want to maintain multiple European listings for an ETF – which they may wish to do in order to have a relationship with the relevant regulator, and to enable retail marketing – there will now be a single order pool for secondary market trading purposes in Belgium, France and the Netherlands. It’s probably also worth mentioning that we’re rolling out UTP – a universal trading platform – which is a way of connecting all major segments within the trading process.
IU.eu: Can you clarify whether US ETF providers can cross-list their funds in Europe, and European ETF providers in the US?
Dallmer: Currently one US ETF – the Diamonds – is cross-listed on NYSE Euronext Amsterdam and traded in Euros. Originally the listing was in US dollars, but the fund was relaunched in Euros in late December. The cross-listing was permitted under the Dutch regulatory environment, which recognises funds that are regulated and registered with the SEC. In the US, the regulation and registration of ETFs by the SEC is limited to US Registered Investment Advisers, so US law does not permit cross-listing of a non-US ETF within the United States. A European ETF provider that wanted to operate in the US would have to set up a physical presence there.
IU.eu: So, bearing in mind that US ETF providers can cross-list in Europe, do you expect them to do that, or to relocate here and build European-domiciled fund platforms?
Dallmer: We already have a few with a presence in both markets – for example, Barclays Global Investors, parent investment adviser for iShares, and Invesco, the parent company investment adviser behind the Powershares brand. For other US managers, simply cross-listing ETFs in Europe will not guarantee that investors will be aware of a product, so it depends on how much they’re willing to invest to gather European assets. US funds that are cross-listed will also not be UCITS-compliant, so this would reduce the potential investment pool that they might draw from. You also need to support funds from the point of view of education, product awareness and outreach to retail investors.
IU.eu: What is the likely impact of the new Multilateral Trading Facilities (MTFs) – for example Chi-X, Turquoise – on the ETF market?
Dallmer: Just as happened in the US, we’re seeing more competition from new trading platforms, which is always good for the marketplace. The new platforms have to invest in sustainable and efficient technologies, and they have to be able to support the various clearing channels. Some platforms have made some inroads, and we’ll see how this plays out. The importance of a regulated market place, secured clearing, and varied clearing models – these factors also impact where order flows head to.
IU.eu: We hear reports that market-makers are reluctant to seed new ETFs and are carrying lower inventories than before – won’t this affect secondary market trading volumes, and what can be done about it?
Dallmer: Arbitrage players, and market-makers in general are managing their inventory differently in this environment of financial crisis than before. Liquidity lines are tighter, and the short-selling restrictions from last fall have increased the cost of maintaining inventory and transacting. ETFs are no different from equities, and have been affected. It’s become more difficult to borrow securities, and this has had a knock-on effect on the amount of inventory people are willing to carry. Spreads on equities have widened out and become more volatile, and ETFs – which are made up of the same equities – reflect this in their own spreads. I think things will improve as and when the liquidity crisis improves.