Competitive pricing dominates buy-side ETF counterparty selection decisions

Research from Jane Street shows that buy-side firms look for competitive pricing when choosing a counterparty to trade ETFs.

Price competitiveness has been cited as the most influential factor for buy-side institutions globally when choosing a liquidity provider for exchange-traded funds (ETFs), according to research from Jane Street.

Jane Street surveyed almost 300 buy-side ETF traders in the US, Europe and Asia Pacific and found that asset managers weigh a number of factors when selecting ETF trading counterparties, which shift according to trade size and type.

Price competitiveness dominates that list of factors, with a majority of 71% of buy-siders in Europe, 41% in Asia Pacific and 48% in the US –  55% globally overall – agreeing that it is the most important criteria which influences their decision to select an ETF liquidity provider.

“Investors worldwide value cost efficiency, and in an environment of low and falling asset management fees – the product of heightened competition – trade pricing has an increased prominence in institutions’ total cost of ownership calculations,” the report explained.

Jane Street added that the emphasis on pricing coincides with a year-on-year increase in the percentage of asset managers using ETFs as part of their core asset allocations, which has surged from 25% last year to 35% this year.

“As ETFs have become more central to buy‑side firms’ investment strategies, and trade sizes have grown accordingly, it follows that pricing would come into sharper focus,” the report stated.

Slawomir Rzeszotko, head of institutional sales and trading for Europe at Jane Street, added that MiFID II has likely played a part in influencing the buy-side’s emphasis on competitive pricing.

“Fee compression and a focus on the core have been key themes for ETF asset flows – and similar trends are emerging in ETF trading,” Rzeszotko commented.

“Particularly in Europe, the focus on MiFID II and best execution is driving down costs and emphasising the importance of competitive pricing. Institutions have become more discerning about their trading counterparties and market makers are gaining ground.”