BATS Chi-X Europe vows to fix broken ETF market

Pan-European exchange BATS Chi-X Europe has launched a listing business with two iShares exchange traded funds in a move that it believes will “fix” the European ETF market.

Pan-European exchange BATS Chi-X Europe has launched a listing business with two iShares exchange-traded funds (ETFs) in a move that it believes will “fix” the European ETF market.

The two ETFs – iShares MSCI Emerging Markets UCITS ETF and the iShares MSCI World Minimum Volatility UCITS ETF – are expected to begin trading on BATS Chi-X Europe in November this year.

Having become a recognised investment exchange (RIE) earlier this year, after previously operated as a multilateral trading facility (MTF), BATS Chi-X’s entry into the listings market could be one of the biggest developments in pan-European trading since BATS Europe and Chi-X Europe merged in 2011.

BATS Chi-X Europe CEO, Mark Hemsley, said the introduction of the listing business will help tackle much of the post-Markets in Financial Instruments Directive fragmentation that has occurred in the ETF market in recent years.

“Historically in Europe, in order to gain access to different markets, firms would list the same ETF on multiple venues,” he explains. “Given the nature of how post-trade has evolved, this would often end up with them settling in a separate CSD and clearing in separate CCPs.”

According to Hemsley, this results in both fragmentation at the trading level and fragmentation at the settlement level. The result is that if you were long on an ETF in Paris and short on it in Milan, then the two did not net at the settlement level. 

BATS Chi-X said it wanted to look at Europe as a single environment, which is why it sought RIE status earlier this year so it could list securities and help market participants make their ETF trading more straightforward.

“We will treat these as pan-European securities and get away from the old way of doing things where ETFs were listed, cleared and settled in many different places. We want to glue the liquidity in the market back together,” Hemsley added. 

In order to help provide liquidity in the market, BATS Chi-X Europe is also launching a new incentive for market-makers, the competitive liquidity provider scheme, which will make a daily award to whoever provides the best bid or offer the majority of the time.

Guy Simpkin, European head of business development, who has been appointed to lead the new listings business, said: “We’re operating the competitive liquidity provider scheme alongside the maker-taker pricing model so market-makers will benefit from both the trading and quoting aspects of the business.”

This is also the first time that issuers are able to directly award market-makers for providing liquidity in a European market, according to Simpkin, as they sponsor the liquidity scheme. Direct incentivisation by issuers of securities has been evolving in the US in recent years.

While the initial offering consists of just two ETFs, Hemsley is hopeful that more products will be listed on the exchange in the near future, both from iShares and other issuers.

“We’ve already had a lot of success in the ETF market in the US. While it is certainly much more challenging in Europe with the fragmented liquidity and all the post-trade issues to work with, we’re hopeful that both the competitive liquidity provider programme, which has been important to building the US business, combined with our other strengths will attract liquidity to us and help develop over time a pan-European listing solution,” added Hemsley.

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