Liquidity at Risk Due to Growing Emphasis on ETFs – ITG Survey Shows

The survey covered ETFs, transparency, and the upcoming MiFID II legislation in the Canadian market.

ITG (NYSE:ITG), an independent execution broker and financial technology provider, recently released the results of a survey conducted by Canadian investment professionals that detailed a number of key industry trends. The survey covered such pertinent topics as exchange-traded-funds (ETFs), transparency, and the upcoming MiFID II legislation, with regards to the Canadian domestic market.

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The survey was conducted at the Trading Matters Conference hosted by ITG in Toronto back in April – the event included more than 120 buy-side and sell-side attendees focusing on ETFs, MiFID II, and unbundling.

Looking at ETFs, 64 percent of respondents were very concerned or somewhat concerned that liquidity could be negatively impacted by the growing use of ETFs. This is telling as ETFs in North America have crept higher over the past few years, reflecting one of the most widely traded instruments in the region.

In addition, 38 percent of respondents felt that to remain competitive in the ETF space, brokers should provide capital as an ETF market maker, while 36 percent felt that brokers need to develop analytics to provide NAV transparency for ETFs. 19 percent saw a need for brokers to build ETF-specific algos.

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With regard to broker transparency, Canada is an isolated case, given that it presently acts as one of the few developed equity markets to employ public broker numbers for trades – of the respondents surveyed, 42 percent felt that broker numbers are still extremely relevant while 48 percent answered that this practice is somewhat relevant in today’s market.

One of the largest areas of emphasis was on MiFID II, as indicated by the questions and focus of the survey. While the legislation only comes into effect in January 2018, many firms are already moving to shore up their operations and maintain the requirements that will be mandated under the regulatory changes next year.

The vast majority of survey respondents agreed that the coming MiFID II rules on unbundling research from execution would likely be positive for independent research providers, given that smaller asset managers devote more of their investment research budgets to the independents. 84 percent of respondents currently utilize independent research at least some of the time.

Additionally, the survey showed that unbundling was not just a European phenomenon, with 17 percent of respondents reporting that they are already fully unbundled and another 44 percent planning to unbundle in 2018 or thereafter.

Etienne Phaneuf

According to Etienne Phaneuf, CEO of ITG Canada, in a statement on the survey and its results: “The Canadian investment industry is in a period of evolution, with changing fund flows, market structure and financial regulation creating new challenges for institutional investors. We are committed to partnering with our clients to provide innovative tools and expert guidance to navigate the road ahead.”

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