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Bats Europe Enables Direct Access for Buy-Side Managers

According to MarketsMuse market structure mavens, if you can say “dis-intermediate” five times in under 5 seconds, or if you can simply spell the word (without looking at this blog post), then “you’ll get the joke” i.e. exchange operator Bats Global Markets (acquired last year by CBOE for $3.2bil) is a disrupt-or. After sell-side firms were given direct access to a new block trading service for the European equity market launched by stock exchange operator Bats Europe in December,  it was just revealed that starting next month, buy-side asset managers will gain direct access to the same block trading platform. The pending roll-out will enable buy-side traders to submit their own Indications of Interest (IOIs) so as to reduce information slippage.

Bats Europe licensed technology from Bids Trading, the largest block trading ATS by volume in the US to launch Bats LIS (Large in Scale) in December. Per reporting from Markets Media….

Dave Howson, chief operating officer at Bats Europe, told Markets Media that average trade size has grown to more than €1m over the past month since sell-side firms were given direct access to Bats LIS. He added: “We have eight to ten brokers regularly utilizing the platform with additional participants joining all the time.”

Buy-side firms have been able to access Bats LIS through a broker but the service is being rolled out so asset managers also have direct access.

Dave Howson, Bats

“Over the next month, buy side will have direct access to submit indications of interest into the Bats LIS platform,” said Howson. “One of the key benefits of the platform is that the buy side control their IOI up until it is matched before turning it over to a designated broker for execution, which means information leakage in minimized.”

Under MiFID II, the new European Union regulations which come into effect in January next year, block trades above a specified minimum size can trade under a large in scale waiver which allows market participants to negotiate trades without the need to make quotes public to meet the pre-trade transparency requirements. The ability to trade large blocks will become even more important as MiFID II also places volume caps on trading in a dark pool without a waiver.

Another MiFID II compliant service for block trading that has been introduced by Bats Europe is the Periodic Auctions book. Launched in October 2015, the Periodic Auctions book is a separate lit book that independently operates intra-day auctions throughout the day. Howson said: “A priority is to change the structure of our Periodic Auction order book to optimise the duration of the auction, which should result in increased order matching.”

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He continued that another priority in Europe is to increase the volume of trading of exchange-traded funds, which should be boosted by the MiFID II requirements to report ETF trading. Howson added: “The new trade reporting obligation under MiFID II will increase transparency in ETFs so should we expect to see an increase trading of these products on trading venues.”

In June last year Bats launched a new indices business with the introduction of a UK-focused benchmark index series of 18 different indices. In December, Bats added eight indices for the French, German, Italian and Swiss markets bringing the total number of European indices managed by Bats to 26.

“We are currently focused on building European coverage with our indices,” added Howson. “Further down the road we’ll look to create products on the back of the indices, but right now we’re focused on expanding our reach.”

Bats Europe operates a trade reporting facility, BXTR, which will be registered under MiFID II.  BXTR reported more than €4.8trillion in transactions last year.

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Buy-Side Beefs Up Use of ETF Products; They Finally Get The Joke

ETF product use among the Buy-Side is no longer viewed as “just a portfolio re-balance or transition management tool,”  according to a survey of the investment industry’s largest portfolio managers. More PMs than ever are finally ‘getting the joke’ with regard to the value proposition of Exchange-Traded Funds (ETFs), according to a recent report by State Street Global. The up-trending holdings of ETF products across the institutional manager community is attributed to a variety of reasons that include better product education, the ongoing search for alpha, the need to reduce single-stock exposure, and according to Europe-based fund managers, ETF products are ideal vehicles to express global macro investment views.

According to recent research from State Street Global, 85% of investment professionals are using exchange-traded funds (ETFs) to gain exposure to individual sectors or industries. More than one-quarter of survey respondents (26%) report that over 20% of their assets under management are allocated to sector/industry ETFs.

This research is based on State Street Global Advisors’ Survey of Investment Professionals’ Sector and Industry Investing Attitudes and Usage, completed in the first quarter of 2016. The study comprised web-based interviews with 419 financial advisors and wealth managers.

While it is hard to compare the two conventionally – the average daily amount of stock trading as measured by Bats Global runs around 7.30 billion shares compared to 1.3 billion for ETFs, the latter reported by SSGA. When compared on a notional dollar basis, ETFs hit $13.1 billion versus $48.5 billion for stocks.

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The estimated value of all ETF shares issued exceeded that of shares redeemed by $5.60 billion for the week ended October 26, 2016, the Investment Company Institute recently reported. For ETFs backed by equities, for the week ended November 1 net issuance hit $5.23 billion for the week, compared to estimated net issuance of $2.38 billion in the previous week. Domestic equity ETFs had estimated net issuance of $4.03 billion, and world equity ETFs had estimated net issuance of $1.19 billion.

Nick Good, co-head of the Global SPDR business at State Street Global Advisors, told Markets Media that the research pointed a rosy picture for ETFs going forward. He said the survey found that the use of sector and industry ETFs is highest among private wealth managers, with 92 percent reporting they had some exposure to the sector and/or industry funds; followed by independent/regional broker dealer advisors (87 percent), National Broker Dealer advisors (86 percent) and Registered Investment Advisors (80 percent).

“The most important variables these investment professionals consider when choosing a specific sector or industry ETF are liquidity, expense ratio and the fund’s holdings,” he said.

Looking ahead, 45 percent of financial advisors surveyed report they plan to increase usage of ETFs while another 50 percent said they plan to maintain their current allocation of sector and industry ETFs in the future.

Advisors’ top reasons for incorporating sector and industry ETFs into client portfolios include:

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What’s Next? Buy-Side Traders Plot To Embrace Market-Making

For exchange-based specialists, prop floor traders and upstairs sell-side market-makers, the notion of buy-side traders putting on the hat of risk-taking market-making is a head scratcher. Sure, there’s a cadre of hedge fund wonks who have interned on a sell-side trading desk, then moved up to Greenwich to grab a slot at one of the many firms run by former trading desk heads who now think they can displace the traditional liquidity providers and do a better job of making markets than their counterparts across the aisle. You know who they are; the ones who get a charge out of bashing their sell-side sales/trader with comments like “Listen, if you can’t fill me right now, I’LL make a two-sided market away from you and prove to you what an idiot you are!”

While sell-side folks scoff at that kind of blasphemy, given the more than two decade process in which electronification has upended equities market structure (and now doing the same to FX, Commodities and UST markets), it shouldn’t surprise anyone that there is growing movement in which buy-side equities traders are plotting to take the model of disintermediation one step further and conjuring up business plans that would have them providing liquidity to the market (via making two-sided markets), instead of their historic role of having a one-sided axe in a particular name.

With that entree, we segue into a fresh-off-the-press column from Shanny Basar at Markets Media “Buy-side Looks to Fill Market-Making Vacuum”….

Nearly half of hedge funds said they would evaluate being market makers in certain securities as banks pull back from some markets, according to a new survey from State Street.

In a report “Let’s Talk Liquidity: Opportunities in a New Market Environment”, State Street surveyed institutional investors on whether market liquidity has deteriorated. Banks have shrunk their balance sheets in response to the increase in capital requirement from regulations such as Basel III, Dodd-Frank and Solvency II and pulled back from some activities. The study had 300 global respondents which included 150 asset owners and 150 asset managers, including 50 hedge funds.

John Bolton, State Street

John Bolton, State Street

John Bolton, global head of thought leadership at State Street, said in a media briefing today that 30% of respondents said the liquidity of their institution’s portfolio had decreased over the past three years, while 28% said it was unchanged. Nearly half, 48%, believe decreased market liquidity is a structural issue and not likely to change.

As a result 49% of respondents believe the role of non-bank institutions as providers of market liquidity will increase, with large pension funds and buy-side firms making prices.

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“43% of hedge funds would evaluate being market makers in certain securities,” added Bolton.

Alex Lawson, head of securities finance, Europe, Middle East and Africa at State Street said at the briefing that in addition to new entrants in market making, the decrease in liquidity will lead to an increase in electronic trading and peer-to-peer connectivity so participants can directly meet their financing needs without the need for intermediaries.

Lawson added: “Regulations have changed the capacity in the market and there are new entrants who have capacity such as Canadian banks and non-banks.”

For example, State Street launched an enhanced custody offering in the US seven years ago and in EMEA three years ago as an alternative to traditional prime brokerage financing as the custodian generates large amounts of internal cash. Clients can borrow and finance securities directly with State Street within a segregated custody account.

Lawson continued that the International Securities Lending conference in June included a panel in which two asset owners, including a sovereign wealth fund, and two hedge funds discussed how they were changing their use of the securities lending market and becoming less reliant on banks.

In order to access more liquidity 48% of institutions said they will increase their use of electronic trading platforms and nearly six in 10 believe the electrification of over-the-counter markets will accelerate over the next three years.

“The industry needs to add capacity so we believe in allowing clients to connect in many ways as possible,” added Lawson. “That could include agency lending, across an electronic platform or through facilitating direct relationships.”

The International Securities Lending Association said in its latest half-yearly market report that there have been significant changes in how institutional investors have been using repo and securities lending markets in the past two years.

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What’s Next? Buy-Side Traders Plot To Embrace Market-Making

Not So Bad After All For Europe ETFs

Courtesy of the ETF Professor at Benzinga.com

MarketsMuse extends our warm wishes to all of those celebrating the Jewish New Year and extending  you  “L’Shanah Tovah”

Today’s piece from ETF Professor couldn’t be better timed considering the upcoming (Oct 11)  European Investing & Trading Summit at London’s May Fair Hotel with a special ‘carve-out’ focused on ETF trading and liquidity across the Euro landscape.

Summit Coordinator MarketsMedia advises us at press time that the ETF trading session, hosted by WallachBeth Capital MD Andy McOrmond, is oversubscribed, but additional tix are being made available.

In theory, 2012 should have been a much darker year for ETFs tracking eurozone nations. Headlines have included speculation about Greece’s imminent departure from the eurozone, the need for a massive bailout of Spanish banks and Italy not being far behind in the bailout buffet line.

Then there are these facts. Italy is mired in a recession. Spain’s unemployment rate is over 20 percent and Greece could make the ominous switch to emerging market from developed market status.

Those are just a few of the issues Europe ETFs have had to deal with in 2012. Apparently, markets are not all that logical because while many global investors have anointed U.S. equities the toast of the developed world because the SPDR S&P 500 SPY -0.42% is up 16 percent year-to-date, some eurozone ETFs are doing quite well, too.

iShares MSCI France Index Fund EWQ -1.57%

France departed the AAA credit rating club earlier this year, but the CAC 40 Index has posted a gain of 11.2 percent year-to-date. The iShares MSCI France Index Fund has been even better with a gain of nearly 13 percent. A large part of the reason for EWQ’s good fortune is that many of its components derive the bulk of their revenue from outside the eurozone.

For example, Total TOT -1.56% and Sanofi SNY -1.40% account for about 22 percent of EWQ’s weight and neither is eurozone dependent. EWQ needs to move above $22.65 to confirm another breakout.

iShares MSCI Belgium Investable Market Index Fund EWK -0.94%

Belgium is another surprise eurozone winner this year, particularly because the country endured some ratings downgrades in late 2011. In fact, 2011 was so rough on EWK it was outperformed by the iShares MSCI Spain Index Fund EWP -2.96% and the iShares S&P Europe 350 Index Fund IEV -1.28% . Continue reading