New Light Shines On Europe ETF Trading

Q1 numbers suggest Europe's new regulatory regime has instigated a seismic shift in how ETPs are traded overseas.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

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.

Markets Dominated By Institutional Players

So many listings on so many venues has led to fragmented liquidity in the European ETP market. It has also complicated the post-trade process and led to difficulties in creation/redemption, since authorized participants sometimes must coordinate their trades across one or more settlement facilities.

Given these conditions, large institutional investors often have a significant advantage in Europe over smaller retail players, since institutions have the size and scale to participate in multiple regional markets at once.

As such, there are far fewer retail ETP investors in Europe than there are in the U.S., and the vast majority of ETP growth is driven by institutional investors trading in bulk lots, with the intent to buy and hold.

Off- Vs. On-Exchange Trading

To source trades at the scale they require, large European institutions that wish to trade ETPs often go off-exchange and into over-the-counter (OTC) markets.

Cboe Europe, Europe's largest equities exchange and trade reporting venue, estimates that over the past four years, as much as 70% of all trading activity in ETPs has occurred OTC. (Cboe Europe is owned by Cboe Global Markets, which is the parent company of

Under the original version of MiFID, ETPs were not considered a separate asset; therefore, investors were not required to report the details of their OTC ETP trades, meaning that issuers, exchanges and even other investors had little insight into what trading activity occurred outside "lit" venues (e.g., on an exchange).

With so many trades going unreported, the true size and liquidity of the ETP market in Europe was difficult to gauge. Lack of transparency had complicated price discovery and driven up costs for some investors, while keeping many others, including many retail participants, on the sidelines.

MiFID II Shines A Light

Then came MiFID II.

MiFID II was designed to increase transparency by requiring investors—including those participating in OTC markets—to report more information about their trades.

Under the new regulations, ETP investors must now report no fewer than 81 data points about each transaction made, including the identity of both buyer and seller, the executed price of the trade and the lot size traded.

Trade data will be date- and time-stamped, published through an approved publication arrangement (APA), and must be stored for at least five years.

Through MiFID II, the European Union aims to foster market safety, transparency and accountability, as well as boost investor confidence and participation. Regulators also hope to encourage some portion of OTC participants to shift their trades onto an exchange, where that activity can be regulated, tracked and audited. if need be.

Early Results: Investors Shift From OTC Venues

Though preliminary, trading data from first quarter 2018 suggest regulators' hoped-for shift to on-book trades may be occurring.

According to historical data, more than half (50.2%) of total reported ETP trade value in 2017 took place off-book/OTC, as compared with 48.0% in lit venues. ("Off-book" refers to OTC trades that were brought on-exchange where they could be price-validated, reported and available for clearing by a central counterparty clearinghouse.)


Annualized numbers based on Q1 2018's reported data, however, suggest that as much as 61% of reported ETP trade value is projected to occur on-book/on-exchange in 2018, as compared with only 39% in OTC venues.


Figure 1. Estimated Size of European ETP Market, By Total Value Traded (in € m)

For a larger view, please click on the image above.


Source: Cboe Europe; data as of March 31, 2018


Likewise, total volumes of trades made OTC are likely to fall. Between 2016 and 2017, volume of reported off-book/OTC trades fell 35%, even as the total reported value of those trades rose by 9%.

However, annualizing the Q1 2018 trade data shows that between 2017 and 2018, volume of reported off-book/OTC trades could fall another 48%, even as the value of those trades falls 13%.


Reported Europe ETP Value Traded, in € millions

For a larger view, please click on the image above.


Source: Cboe Europe; data as of March 31, 2018


However, it must be stressed that the above numbers provide an incomplete picture, since only 60% of OTC trades in the European ETP market were reported in 2017. Furthermore, Cboe Europe has no means by which to record reported trades made on certain other platforms, such as TRADEcho.


Massive Increase In Reported Trade Data

Still, the newly reported data is revealing, as the intended effect of MiFID II was to shine a light on the OTC ETP markets, revealing their true depth and size. Thus, as reporting of OTC trades becomes mandatory, one might likewise expect to see the total value traded to rise, in tandem.

One would also expect to see some portion of OTC investors take their book on exchange, so as to take advantage of the more streamlined reporting process offered there.

In both cases, that is exactly what has happened.

In the first quarter of the year, there was a massive increase in the reported average per-trade value for OTC ETP trades. On an annualized basis, the average OTC ETP trade value is projected to be a whopping 67% higher in 2018 than for 2017.

Rather than representing a sudden spike in the amount of money investors were exchanging OTC, this figure likely represents trading value that had always been there, but that simply went unreported until MiFID II went into effect.

Furthermore, the percentage that OTC markets comprising the total reported ETP trading value declined 11.5%, even as that percentage increased for lit venues by 11.2%. This suggests institutions that had previously traded on OTC markets may have instead moved that portion of their book to regulated exchanges.

Transparency = Efficiency

Though it is too early to draw many conclusions from this data, one thing is clear: MiFID II has indeed helped increase transparency in the European ETP market.

"Whilst the market has always acknowledged that the bulk of ETP value trading has been OTC, only those really involved were able to see it," said Guy Simpkin, head of business development and Cboe Europe, in the research note distributed to European clients. "Being able to quantify the market's actual liquidity and observe the price of trades, large and small, will encourage greater investment, enhance price formation and lead to further and broader activity."

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for and ETF Report.