SIX Swiss Breakfast Workshop: The evolving role of an exchange in trading ETFs

The growth of request-for-quote trading has led exchanges to rethink their offering

Theo Andrew

Web Res 2023.12.06 ETF Stream Six Event 36 (1)

The growing dominance of request-for-quote (RFQ) trading within ETFs is leading many exchanges to evolve their offering in a bid to keep their market share.

Speaking at a recent ETF Stream Breakfast Workshop, Adam Sherlock, head of equity sales Europe at SIX Swiss Exchange, said despite a 50% increase in overall ETF turnover over the past five years, the industry could do more to optimise ETF trading in Europe.

This is one of the key drivers behind SIX’s decision to become the first exchange to offer pan-European ETF trading on its on-exchange RFQ platform – ETF Quote-on-Demand (QoD) Europe – last December.

“The daily ETF value traded over the past five years has – in periods of volatility and spikes – experienced more like 100% growth”, Sherlock said. “However, on-exchange turnover has remained relatively stable during this period, in the high €30-40bn per month. The real winners are RFQ platforms which have been vacuuming up much of this growth.

“There are ways we can optimise ETF trading in Europe today and as an industry, do better.”

Chart 1 six swiss

Closing the gap

While ETF trading is primarily executed via RFQ or on exchange, Sherlock believes the industry should look towards the more sophisticated practice of equity trading in a bid to increase trading options.

“Equity trading prides itself on navigating market complexity, using a sophisticated and diverse mix of mechanisms,” he said. “In contrast, trading an ETF is much more simplistic, often a decision made at firm level and more commonly being made in favour of RFQ.”

“At SIX, we are trying to close the gap between the asset class of equities, not pushing complexity for the sake of it, but by taking a hybrid approach and leveraging the best of different mechanisms through data-driven decision making.”

Sherlock also noted ‘lit’ order books in ETFs do not behave as they do in other asset classes, but can absorb “much more volume” than many give them credit for when put through a liquidity stress test.

Sherlock drew on the example of October 2023 to show liquidity absorption ability of the lit order book: Of the 1,700 ETFs listed with SIX Swiss Exchange, more than 10% of them had at least a single trading day where their lit turnover exceeded the average daily value traded (ADVT) by more than 10 times.

One example, the Amundi MSCI Emerging Markets UCITS ETF (AEEM), traded 24 times its ADVT in just the last 90 minutes of the trading day on SIX.

“This had no meaningful impact on pricing. In fact, the spreads were the tightest in that window than over the entire daily period,” Sherlock said. “That suggests there is meaningful natural buy and sell liquidity in the most liquid European ETF names that should have the opportunity to meet each other.”

Chart 2 six swiss

The rise of algos

Sherlock said ‘lit’ order books give greater flexibility in the time horizon in which a trade is executed while a “point in time trade” via RFQ runs the risk-reward of executing at both a favourable and unfavourable price.

“RFQ does not allow passive liquidity capture in a liquid ETF with plenty of natural liquidity. Trading should combine passive liquidity capture with opportunistic spread crossing behaviours,” he said. “The growing momentum around the use of algorithms in ETF execution is a big step in the right direction from our perspective.”

Despite this, he noted ETF-specific algos “which respect their bespoke market structure” was the way forward as opposed to using an equities algo “in the hope for great outcomes”.

SIX Swiss Exchange’s QoD platform enables buy-side dealers to trade ETFs on other primary exchanges, bringing the number of ETFs available to trade to approximately 6,000, up from 1,700 currently listed on the exchange.

“With QoD Europe, we are working to improve the choice that either a trader or an algo has when deciding to trade an ETF on a pan-European basis,” Sherlock said.

He added the platform’s “sweet spot” was mid-sized trades, noting a >20% price improvement over primary liquidity prices.

“We believe there is space for these workflows to support the intelligent integration into decision-making and maximising the role they play in the execution of ETFs,” Sherlock said.

ETF QOD Europe

The novel service ETF QOD Europe offered by SIX represents an extension of the existing Exchange Traded Funds (ETF) franchise. In addition to over 1,700 tradable products listed at SIX Swiss Exchange, trading participants are now able to trade ETFs listed on other primary exchanges like the London Stock Exchange, Euronext Amsterdam, Euronext Brussels, Euronext Paris, Deutsche Börse XETRA, Borsa Italiana, Wiener Börse AG or Nasdaq Stockholm AB.

This innovative trading service offers efficient straight-through processing using the interoperable Central Counterparty (CCP) model with settlement into domestic Central Security Depositories (CSDs). This service-extension positions SIX as leading primary regulated exchange operator offering the biggest ETF product universe: approx. 6,000 ETFs and ETPs are tradable on its on-exchange Request for Quote (RFQ)-platform QOD, making SIX the first exchange operator to offer pan-European on-exchange RFQ Trading for ETFs.


This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.

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