Turquoise, the equity trading venue majority-owned by the London Stock Exchange, is to launch a specialist market for exchange-traded funds in a bid to boost liquidity in the products.
The London-based platform has joined forces with TrackInsight, part of investment adviser Koris International, to launch a market segment for trading only highly rated ETFs.
TrackInsight independently rates over 900 European ETFs based on factors such as tracking difference, helping investors choose the most suitable ETF for their portfolio. Over 100 of the firm’s most-highly rated products, known as its ‘A-list ETFs’, will trade on the new Turquoise segment, to be launched this year.
Jean-René Giraud, chief executive of Koris International, said: “We are trying to help focus liquidity not on the biggest ETFs, but the best. The new segment on the Turquoise platform will list only the best-in-class ETFs.”
In Europe, the term ETF is a misnomer because the majority of the products are traded privately among banks in over-the-counter markets. As there is no requirement for these OTC trades to be reported, investors often complain they do not have a clear view of liquidity in the products. Those that do trade on exchange are fragmented across multiple European markets, with liquidity concentrated in relatively few ETFs which have the largest assets under management.
A revised version of the EU’s trading rulebook, known as Mifid II, is expected to overhaul the European ETF market by forcing trades to be reported. Turquoise’s chief executive Robert Barnes said this new segment would help implement some of the workflow required around ETFs as they became Mifid II securities and “de-risk” that process.
The move comes amid wider concerns over transparency in the ETF market. The growth of “smart beta” ETFs, ones based on alternatives to traditional indices, could be hampered by index providers’ unwillingness to share information with investors, according to the French business school Edhec.
Edhec canvassed opinions from 180 ETF buyers managing a collective €3.1 trillion, finding that interest in smart beta ETFs is keen, with 37% of the investors already using them and 33% considering them. But investors are also struggling to get the information and disclosure they need to understand the products, the Edhec survey found.
Felix Goltz, head of applied research at the Edhec-Risk Institute, said index providers – who typically license the smart beta indexes to fund managers so they can create investable ETFs – seemed particularly reluctant to share information relating to how the indexes are created.
He said: “New indexes are typically back-tested to make sure they perform, before the ETF is created. A very simple thing would be to get access to the portfolio holdings during the back-test period. If you are going to analyse the strategy, you have to understand the back-test.
Goltz said: “There is a risk that investors might shy away. There is also the risk that they will invest without understanding properly what they are investing in.”