Exchanges compete to improve ETF investor experience
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The competition among exchanges for ETF business is driving innovations that help make buying and selling shares easier and more attractive to investors, executives say.
Cboe’s BZX Exchange debuted a programme on Monday that allows ETF market makers to receive better payments from the exchange for providing liquidity on heavily traded products, rather than receiving a flat incentive payment for taking on lead market maker duties. This payment, which is capped at 0.39 cents per share, is roughly double the standard rebate that the exchange provides for adding liquidity to the exchange, according to exchange documents.
The programme is designed to incentivise market makers to take on so-called lead market making duties on heavily traded ETFs. Lead market makers trade an average of at least 1m shares per day. They are also held to high standards for ensuring liquidity and tight spreads on products.
The move pits Cboe against NYSE Arca, the dominant US marketplace for listing the largest ETFs. But NYSE has its own plans to attract and retain listings.
Last month, NYSE received approval to lower its annual listing fees for target-maturity ETFs that liquidate at a certain point, as well as for buffered ETFs. Historically, both types of ETFs were charged $10,000 per year, matching the price charged for active ETFs. But under a fee schedule that went into effect on January 12, the products will pay a $7,500 annual fee, the same amount paid by index-tracking ETFs, an SEC notice states.
The fee cuts are a direct response to the “current extremely competitive environment for [exchange-traded products’] listings,” NYSE Arca notes in its rule change requests. ETF sponsors can easily send new ETF listings, and even transfer existing ETFs to rival venues if they feel fees are excessive or find better incentives elsewhere, it notes.
ETF sponsors and investors win from the arms race to add incentives or new features that help boost trading in ETFs, Ed Rosenberg, head of American Century’s ETF business, said a in December interview. “You have three exchanges competing for listings, and they’re competing on the best service model,” he added.
For several years, ETF sponsors have touted their ability to “diversify” their listings across the three major exchanges, NYSE, Nasdaq and Cboe. This diversification drove the platforms to compete more aggressively for their business. And as a result, in 2017, iShares moved 50 ETFs from NYSE to Cboe and Nasdaq. Since then, VanEck, Ark Investment Management, O’Shares and Vident have also moved listings to different exchanges.
Growth in Cboe’s ETF listings business has been driven in part by the attractive incentives that it offers market makers and ETF issuers, notes Laura Morrison, the exchange’s global head of listings. For example, the exchange offered large ETFs free listings until last year.
Cboe is the primary listing venue for about 18.4 per cent of US ETFs, according to Morningstar Direct. NYSE commands a 64.2 per cent market share, while Nasdaq has 17.4 per cent of primary listings.
Giving lead market makers “the best of both worlds” at a guaranteed rate for less frequently traded products and enhanced rebates for highly active ETFs, is a way to “provide the best market quality possible when [an ETF] is listed on Cboe,” she said.
And wooing traders can have an effect on the issuers, too, she added. “To the extent that a market maker is willing to advocate for one listing venue over another, we obviously want that vote,” Ms Morrison said.
NYSE, however, is not standing still in the ETF listing innovation war. In addition to the fee cuts, the firm has sought to use its intellectual property to differentiate itself.
“Our top priority is to operate the best possible ETF listing and trading marketplace, and we work closely with ETF issuers and liquidity providers to enhance ETF market quality,” Douglas Yones, NYSE’s head of exchange-traded products, said.
In December, NYSE Arca received approval to allow active non-transparent ETFs to list directly on the exchange floor instead of on its all-electronic Arca exchange. The exchange said in 2019 that it intended to open its floor to ETFs, but that was before non-transparent ETFs were approved for launch.
The floor, which combines human traders and technology, is “the gold standard equity market model”, Mr Yones said. It could improve the quality of daily opening and closing auction trades for new and low-volume ETFs, he added. NYSE officials did not disclose when the floor trading was expected to open.
Several ETF capital markets executives intend to closely examine the floor-trading model after it debuts because there is no guarantee that it actually would improve trading, they say.
Choosing an ETF’s primary listing venue and lead market maker are often linked, says Michael Castino, senior vice-president in ETF business development in US Bancorp Fund Services. Market makers may prefer an issuer to list a product on one exchange versus another in order to aggregate ETF trades for better incentive payments, he said.
ETF issuers are often attracted to an exchange’s issuer-support programmes, including marketing and education, as well as events like bell-ringing ceremonies. But ultimately, trading quality is the critical factor.
“You can have the greatest ETF on the planet, but if it doesn’t have good trade execution, it’s going to leave people with a bad taste in their mouth,” Mr Castino said.
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