Though it has only been in place for three months, MiFID II, Europe's new regulatory market regime, appears to be changing how European investors trade exchange-traded products (ETPs).
New trade reporting data collected by Cboe Europe and distributed to clients suggest investors are moving from off-book, over-the-counter trading venues to on-exchange venues.
The first quarter's data on average trade values and volumes also reveal the European ETP market is significantly larger and more liquid than previously had been documented.
What Is MiFID II?
On Jan. 3, 2018, the European Union rolled out its ambitious overhaul of the regulation overseeing its financial markets, the Markets in Financial Instruments Directive (MiFID).
Known as MiFID II, the reforms touch almost every aspect of European securities trading—including, for the first time, ETPs.
Among other things, MiFID II increased reporting requirements for all trades, with the goal of bringing greater transparency, safety and efficiency to European ETP markets known for fragmented liquidity and off-exchange trades.
Europe: Widely Dispersed Market
MiFID II was a much-needed change for the European ETP market, which struggles with being simultaneously big and small.
The European ETP market is far more dispersed than other geographical ETP markets. Unlike the U.S.—where all trades, no matter what the exchange, must settle through the same securities depository—Europe is a confederation of regional markets, each with its own exchanges and settlement facilities.
As such, European ETPs are often listed across multiple exchanges, and trades for each listing usually settle locally. ETPs listed on the Deutsche Bӧrse settle in Germany; ETPs listed on the London Stock Exchange settle in London; and so on.
Due in part to this dispersion across so many local markets, Europe has far more ETPs on offer than any other regional market, even the U.S. According to independent ETF consultancy ETFGI, there were 2,260 ETPs listed in Europe, with 7,278 listings on 27 exchanges, as of year-end 2017, as compared with 2,116 ETPs listed in the U.S. on just four exchanges.
Fewer Assets Invested Overall
Beyond the multiple listings for individual funds, many of these products provide redundant exposure. For example, there are 21 ETPs listed in Europe that track the EURO STOXX 50 Index, a widely tracked benchmark of the 50 largest Eurozone stocks. Eleven issuers offer at least one EURO STOXX 50 ETP, the lot of which are domiciled across four different countries and cross-listed on many others. Compare that to the U.S., where there are only three nonleveraged ETFs that track the S&P 500 Index.
What's more, European ETPs tend to trade in a variety of venues, including multilateral trading facilities (MTFs), request-for-quote (RFQ) platforms and systematic internalizers (SIs); as well as through auctions and on lit and dark books.
Taken together, this could explain in part why, even though European investors have access to roughly the same number of products as American investors, they still have fewer assets invested in ETPs overall.
According to ETFGI, as of the end of 2017, investors held $802 billion in Europe-listed ETPs, compared with the $3.4 trillion invested in U.S.-listed ETPs.