Fair and orderly markets vital for ETFs
Ivan Gilmore (pictured), Head of Exchange Traded Products & Global Product Development, London Stock Exchange writes that with the ETF market having just celebrated its 20th anniversary in Europe, it is a good time to reflect on what the ecosystem is currently delivering for ETF investors…
ETFs have become widely adopted across the globe with investors looking to utilise the ETF ‘wrapper’ to understand the ‘price’ of a great many things across asset classes and geographies. Moreover, Central Banks such as the Bank of Japan and the US Federal Reserve System now utilise ETFs when making asset purchases and many asset management companies are choosing ETFs as the vehicle to launch new ESG fund ranges.
ETFs have long been seen as a lower cost and more transparent way to track a passive benchmark. The first ETF on London Stock Exchange tracked the FTSE 100, and that ETF (ISF) is still one of the most daily traded ETFs on our market 20 years later. Today, there are over 2000 Exchange Traded Products (ETPs) available for trading on London Stock Exchange. However, ETFs are not just transparent in terms of the benchmark or index they follow, but also in giving investors a ‘live’ price at all times, including in times of crisis and high volatility. It’s fair to say that being able to observe prices, and therefore supply and demand dynamics, is an important part of any marketplace.
So, given financial markets had to navigate a huge market shock in Q1 this year, where some equity indices fell 30 per cent in a little over 20 trading days, how has London Stock Exchange’s ETF market coped? The velocity of the fall in global asset prices is well documented and it’s clear that the sudden collision of multiple factors including a global health pandemic and resulting economic crisis, an oil price shock during a time when firms were implementing remote working and business continuity efforts was not only unprecedented but also hit with alarming synchronicity.
Ensuring the orderly functioning of markets and continuity of services for our customers and stakeholders is a responsibility we take very seriously. London Stock Exchange operates price monitoring extensions (PMEs) and circuit breakers (CBs) each day to ensure that all of our markets operate in a fair and orderly manner. Our analysis shows that the average opening time for a London Stock Exchange listed ETF/ETC in March was within one minute of our official 8am start, and a mere 13 seconds later than the average for 2019. Intraday, our statistics show that circuits breakers (CBs) were triggered in large numbers over many recent weeks as global price volatility hit levels not seen since 2008. In March there were approximately 600 CBs per day for ETF/ETCs, compared to just 13 per day in 2019. We believe this rules-based approach works in everyone’s interest and our ETF market participants continue to engage with us to understand where certain protocols might work well in other use cases as we strive to find the optimal balance between a trading interruption and those seeking price discovery on our market.
Notwithstanding these trading interruptions, London Stock Exchange and other European exchanges witnessed new records for ETF trading in March, showing that despite the CB safety net being called into action repeatedly, new all-time records were set. On London Stock Exchange, monthly records were set for both the average daily number of trades (+163 per cent on 2019) and average daily value of trades (+135 per cent), with an average daily turnover of GBP930 million across our ETF/ETC markets.
Also, when we analyse market maker ‘presence’, ie how much time a market maker is providing prices on our orderbook within certain parameters, we observed that the top three market makers by presence from 2019, saw their presence stats dip from 98.8 per cent in 2019 to 89.1 per cent in March.
Our experienced Market Surveillance Team were in constant dialogue with these and other registered market making firms during this unprecedented period. In March, we widened the maximum spread obligations which our registered market makers must observe when providing liquidity. This gave both market makers and ETF issuers more confidence that the market would continue to operate efficiently during exceptionally difficult trading conditions, conditions that were impacting even the most liquid global futures’ markets. Being able to maintain a level very close to 90 per cent was commendable in the circumstances, especially when considering the business continuity plans that these firms had to action as lockdowns came into force across Europe during that time.
London Stock Exchange believes that it important that markets remain open to support not only companies who will continue to need access to capital, but also to ensure that retail investors have access to their savings, including ETFs and funds. It is also vitally important to ensure that retail and institutional investors can observe prices that will better inform their investment decisions. Once those decisions have been made, they need to be actioned. For those and many other reasons, London Stock Exchange will continue in its commitment to operate and supervise fair and orderly markets.