Fixed income is becoming a larger part of the exchange traded funds (ETFs) universe as investors and traders seek greater flexibility and liquidity, according to panellists at Trade Tech discussing tapping into new opportunities.
“We are seeing that the proportion of fixed income is growing, accounting for around 33% of all ETF trading in the first quarter of 2023, up from 23% during the same time period last year,” says Slawomir Rzeszotko, head of institutional sales and trading, Europe and Asia at Jane Street. “They are being used as a convenient bridge to find liquidity in fixed income markets which have been difficult to navigate.”
As for equities, Tim Miller, senior trader at Fidelity International says, “They have become a meaningful part of the workflow and the volumes have increased by 18% last year compared to 8% for equities. We are also seeing an increase in the use of algos but that is less to do with ETFs and more to do with how people are changing the way they execute trades.”
Market participants agree that request for quote platforms remain the dominant method for trading exchange traded products in Europe. Analysis by Jane Street found RFQ’s ETP trading market share had grown to 50% last year, up from 48% in 2021 and 44% in 2020.
Rzeszotko notes there is a preference in Europe for the RFQ protocol in Europe which has coincided with markets being volatile and difficult to trade.
Market participants in general also believe this is one of the unintended consequences of MiFID II in 2018 which attempted to push more flow onto lit venues.
However, Sander Van Nugteren, managing director, iShares Global Markets EMEA and APAC at BlackRock, believes “there is no one size fits all strategy and different strategies require different trading technology.”
Miller agrees, adding that traders and investors use ETFs for different reasons. For example, some may actively trade them and take advantage of the liquidity in the secondary market while others use ETFS for cash equitisation. It depends on their risk profiles and requirements.
©Markets Media Europe 2023
