According to Tilman Lueder, head of securities markets at the European Commission, it is more “prudent” for the regulator to first address liquidity and fragmentation issues in the underlying securities before focusing on a consolidated tape for ETFs.
A consolidated tape is viewed as crucial to the next stage of growth for ETFs in Europe with investors currently unable to view the full liquidity picture of ETFs.
While the European Commission set out plans in November 2021 to implement a consolidated tape to give investors real-time data for equities, bonds, ETFs and derivatives across all trading venues in the European Union, Lueder said only a tape for equities and bonds would be implemented in “phase one”.
Speaking at ETF Stream’s ETF Ecosystem Unwrapped 2022 event last week, Lueder said: “It is prudent to address liquidity and fragmentation in the underlying market before we address accessibility issues in the ETF units.
“A consolidated tape for ETFs would certainly help investors but we cannot run four tapes in parallel.”
The reason for this, Lueder explained, is portfolio managers optimise out smaller securities from ETFs due to liquidity constraints as they cannot see the average daily volumes (ADVs) without a consolidated tape.
This means small and mid-cap stocks in Europe, for example, miss out on capital flow and cannot grow as quickly as businesses.
“There needs to be more visibility for replicating less liquid indices,” Lueder stressed. “Even within the ETF industry, there has been a greater push on the underlying components. Phase two is to make ETF units more attractive to retail investors.”
However, Keshava Shastry, global head of capital markets at DWS, who also spoke at ETF Ecosystem Unwrapped, responded to Lueder’s comments by claiming there is no need for a separate ETF tape, and that it would be possible to integrate a consolidated tape for ETFs as part of establishing a tape for equities.
One key benefit of a consolidated tape for ETFs is the increased flow to European-listed ETFs. Shastry predicted the European ETF market is missing out on approximately $1trn assets from Asia and Latin America.
“UCITS products are very popular in those regions due to some of the withholding tax benefits compared to US ETFs but the lack of a consolidated tape is causing them hesitation and they still use US ETFs,” he stressed.
"Growth of ETF AUM is being restricted with the lack of a tape due to buy-side clients not being able to see total volume efficiently and quickly in one place."
Questions now turn to how long it will be until a consolidated tape for ETFs is introduced onto the European market. At ETF Ecosystem Unwrapped, Gregoire Blanc, global head of capital markets and liquidity at Amundi, stressed the importance of regulatory action.
"It needs to come from the top," he said.