Increased activity from retail investors and smaller liquidity providers in 2020 has led to a significant portion of ETF trading volumes returning to on-exchange.
Speaking during an ETF trading virtual discussion at TradeTech, head of ETFs at Euronext, Brieuc Louchard, said that on-exchange ETF trading volumes had increased 40% year-on-year at the pan-European exchange operator.
He attributed the increase to a larger number of smaller liquidity providers trading on exchange, offering additional liquidity and encouraging other participants to follow suit.
“We saw more smaller liquidity providers coming onto the market and offering extra liquidity and subsequently some banks that left the ETF market a while ago in Europe are now also coming back. 2020 was a year of maturity for the European ETF market,” he said.
“I think we are getting closer to the US market structure. For me, 2020 was the year of retail access of ETFs on Euronext. Some say it was a short term trend due to COVID-19 but we are now talking in 2021 and the figures are still there in terms of retail participation.”
ETF volumes relating retail investors taking place on the Euronext exchange had almost doubled in 2020 to 15%, in comparison with 8% in 2019, Louchard added, and institutional investors are reportedly following.
“It’s a virtuous cycle. The more liquidity on-screen, the more people will be willing to trade on-screen. The trend is increasing for retail and we are also starting to see some institutional flow going back to the exchange compared with request for quote (RFQ),” said Louchard.
When asked about his use of off-exchange trading mechanisms, head of Lyxor Asset Management’s dealing desk, Cyrille Combes, said his desk had continued to use RFQ platforms and other similar tools due to the size of their trades. He agreed, however, that retail investment was pushing ETF volumes back onto exchanges.
“The trend I think will be step by step a virtual cycle with more and more retail investors coming in. Most of the retail investors are reading the liquidity on exchange data and not on MTF platforms so it’s good to give the real liquidity, kind of like the US market,” said Combes.
Euronext’s Louchard also claimed that an increasing number of market participants were deploying low touch equity algos adapted to the ETF model, including fair value peg orders, in their ETF trading activity.
“Some banks and brokers are starting to offer such execution capacity to the buy-side community. We welcome such initiatives because it brings an equities style of execution to the ETFs, which is a kind of back to basic trend. This is the best way to bring back the (exchange) E and the (traded) T of the ETF,” said Louchard.
The number of retail investors active in the market has surged during the pandemic, with retail broker Interactive Brokers, reporting that it had seen almost 40,000 new accounts during the peak of market volatility in March last year.
Institutional investors have become increasingly concerned with this surge, so much so that several institutions have launched protective initiatives designed to help clients navigate the shifting landscape.
In March earlier this year, broker-dealer Cowen launched an algorithmic trading tool named Inaccessible Liquidity Adjustment that offers clients the option to adjust their trading for liquidity deemed inaccessible, often due to retail trading activity.