Nomura; Tradition Launch First MTF for European Exchange-Traded Funds
Investment bank Nomura Holdings and interdealer broker Tradition on Monday launched an alternative execution platform for European exchange-traded funds they claim will eliminate current market inefficiencies.
The two firms say that the joint venture, coined Navesis ETF, will increase transparency, boost market liquidity, and reduce costs. The platform represents the industry's first multilateral trading facility to allow "qualifying" customers to trade ETFs directly in the primary market in real-time against on-screen prices referenced to an ETF's net-asset value.
From 0900 to 1200 GMT the platform will operate on a continuous call phase accepting bids and offers and from 1200 to 1215GMT it will provide a dark pool phase similar to trading in dark pools. Those are anonymous trading venues favored by large investment fund managers who want to trade large blocks of stock without tipping their hand to the marketplace. Navesis ETF will also provide an auction process once a day. So far, Credit Suisse, UBS and IMC, the Dutch financial services company have signed up to use the platform. Nomura launched the first bank-owned dark pool multilateral trading facility in Europe in December 2009.
Nomura and Tradition are looking to capitalize on a phenomenon in the European equities market where trading on alternative platforms -- multilateral trading facilities -- has taken off since the adoption of the European Markets in Financial Instruments Directive about four years ago. ETFs, favored by large institutional investors which want cheap access to indexes without having to buy underlying securities, are making a comeback. In January, investors poured $34.1 billion in ETFs worldwide -- the largest amount since September 2010, according to New York-based BlackRock Inc., the industry's largest ETF provider. However, Europe continues to lag behind the U.S. European assets under management now total about about $285 billion compared to over $1 billion in the U.S.
"The ETF industry [in Europe] has enjoyed a rapid ascent over the past ten years but structural inefficiencies have meant that the market has not reached its true potential," says Lee Burrows, head of the delta one desk for EMA at Nomura.
The structural inefficiencies refer to the lack of transparency over trading volumes and reliable pricing mechanisms. Until now in Europe's primary ETF market, institutional investors that make large buy and sell orders requiring new ETF units to be created or redeemed often do business over the phone through intermediaries such as market makers and other authorized participants. Such a scenario is in sharp contrast to the US market where most of the trading is done on exchanges in the secondary market.
European ETF issuers quote terms for market makers or other qualified institutional investors, known as authorized participants (APs), to create or redeem ETF units. The APs can then decide what to offer their clients in terms of a price quote which is really an "indicative" price determined by the supply and demand for the ETF offered and can easily differ from the net asset value of the fund. Buying and selling ETFs referenced to their NAVs allows investors to get a price closer to the underlying assets of the fund, say ETF experts.
Navesis ETF also aims to fulfill post-trade transaction reporting requirements for ETFs under a revised version of MiFID, now under debate. Under current European regulations, market players are not required to report ETF trades to regulators because the majority of trades are done over the phone.
