New ETF mechanisms help to boost trading
Efforts to spur secondary market liquidity in exchange-traded funds are beginning to bear fruit, the Tokyo Stock Exchange and ETF service providers told a recent conference in Hong Kong.
Ryota Kimura, the TSE’s senior vice-president of product development, noted at Citi’s annual Asia ETF summit last week that the bourse had raised the number of ETFs it hosts to 110.
That comes despite transaction value of ETF trading on other Asian exchanges (excluding Japan and South Korea) having plummeted 20% to 30% year-on-year in 2012.
Industry players have been keen to underline that investors should not just rely on the average daily volume (ADV) traded on exchange when assessing available ETF liquidity. Off exchange, brokers and participating dealers can also provide bid/ask quotes on ETFs.
The TSE is setting out under its medium-term management plan for 2013 to boost liquidity of ETF trading to at least 5% of the entire trading volume of Japan’s equities market (average daily trading volume amounted to ¥1.15 tillion ($14.5 billion) for September).
“The exchange is working to provide infrastructure that is convenient for all relevant [parties],” says Kimura. “TSE is now lobbying an amendment to be made on … the investment trust law and tax law to facilitate a smooth redemption and creation process.”
To promote efficiency during the creation and redemption of ETF units, Kimura says market-makers will be given special exemptions to allow them to sell short to obtain either ETF units or equities for redemption or recreation before settlement.
Market-makers contracted as participating dealers can also buy and sell ETFs from or to investors through primary-market creation and redemption. In creation, for example, they get money from investors to buy baskets of stocks in exchange for ETF units from the asset manager to fulfil the buy order.
“Also, we are preparing a lending market for ETFs, which could be another solution for reducing market-making costs,” adds Kimura. However, TSE needs to resolve some technical issues before such a market can be established.
Mark Brady, director at BlackRock, told the conference that his firm launched a secondary liquidity matching service in Asia this March for participating dealers that also market-make for ETFs of iShares, the firm’s ETF unit.
Similar to an information exchange where market-makers post indications of interest for ETFs, Brady notes that since launch the platform has matched $80 million worth of ETFs.
“Participating dealers have saved $80,000 on slippage, which at the end of the day results in better pricing for clients,” he says, without giving details on how such slippage is calculated.
He adds that the platform allows market-makers to post orders anonymously, which BlackRock matches up manually, although he stresses that it is not a trading platform.
To drive retail interest, iShares cross-lists many of its ETFs in other markets. For example, it has 14 US-listed ETFs cross-listed in Australia and denominated in Aussie dollars, which have added $1 billion in AUM.
But Steve Kinoshita, who works in sales trading for ETF market-maker Flow Traders, says cross-listing does not necessarily draw more liquidity from retail investors. “No matter how hard we try to quote, if there is no demand [for that ETF] then cross-listing won’t result in any trading,” he says, noting the counter argument that cross-listing can divide liquidity.