Industry viewpoint : Deutsche Börse : ETF Trading

HOW TO MAINTAIN A LEADING POSITION.

As a first mover, Deutsche Börse introduced ETFs in the European market 16 years ago. Michael Krogmann, Head of Cash Market Sales & Partner Markets, explains why Xetra is still the first choice for ETF trading today.

Michael Krogmann
Michael Krogmann, Head of Cash Market Sales & Partner Markets, Xetra

While it certainly took a keen vision and quite some entrepreneurial spirit to list the very first ETFs in Europe in April 2000, it was relatively easy to achieve market leadership when Deutsche Börse introduced its XTF segment on Xetra. Two ETFs on the EURO STOXX 50 index and the STOXX Europe 50 index respectively, with an average monthly trading volume of E200 million, were sufficient in those days to be the European ETF reference market. Since first movers always have the advantage of momentum competitors, following on their path have not, so market leadership will be guaranteed, for at least a while. However, without continuous efforts to innovate, optimise and expand products and services, being a first mover will get a business enterprise only so far.

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Is size really everything?

Size is very important, there is no arguing about that fact. Size, as in trading volume, allows for high liquidity and, therefore, tight spreads, translating into low transaction costs. Size, as in product range, gives investors more choices which is also a competitive advantage. Average monthly ETF trading volumes on Xetra have grown to E14.6 billion. Assets under management have risen from E400 million in 2001 to E358.157 billion today (see chart 1). In the same time span, the product offering has been expanded from 2 to 1,136 ETFs. Currently, Deutsche Börse holds an ETF market share of 31 percent in Europe.

While these figures are impressive, they show only the quantitative side. There is another: the liquidity in ETF trading on Xetra stems from a heterogeneous order flow, reflecting the various business models of institutional investors, brokers and retail investors alike. In addition to some 4,000 traders and 200 banks and financial companies, Deutsche Börse caters for even more liquidity with the help of special market maker incentives and programs which have attracted 19 Designated Sponsors so far, providing liquidity as deep as it is high.

Exactly the same goes for Xetra’s ETF range: it is, above all, about quality. Engaging in continuous dialogue with ETF issuers and market participants, Deutsche Börse has always put much effort in attracting listing of ETFs that best support the trading strategies of market participants. Giving a more concrete picture: over the last five years Deutsche Börse’s product offering could be expanded among others by the first ETF on volatility, the first ETFs on Chinese A-shares, and the first ETFs on Chinese sovereign bonds and Indian corporate bonds. In 2016, the very first ETF on an Israeli stock index, as well as the first ETF on Turkish government bonds were listed on Deutsche Börse. Also, investors can additionally benefit from an increasing number of smart beta ETFs that are structured around factors other than market capitalisation, such as dividends, earnings, or value. So, the wide product range on Xetra is by no means the result of an attempt to outperform other trading venues in terms of choice. On the contrary; over the last 15 years Deutsche Börse has observed more than 350 ETFs having been delisted from Xetra. This is a sign of healthy market development and ensures a clear and concise offering to investors.

Should costs be the central decision-making factor for investors?

One of the main advantages of ETFs is cost-efficiency, thanks to highly liquid trading and low management costs. This is the very reason ETFs trading volumes usually do not decline in times of crisis or highly volatile markets. Often, the very opposite is the case, as the Brexit vote has shown recently. So, yes, trading costs should be imperative for an investor when deciding where to trade. Deutsche Börse caters to this in many ways. One of them is to offer the tightest spreads, in many products unmatched by competitors. The spread in the most liquid equity ETFs on Xetra is only six basis points for a roundtrip order of E100,000. As every investor should know, 80 percent of the costs of a trade are determined by the spread, trading fees are only a small part of the overall transaction costs. Unlike other trading venues, Xetra does not only claim to have the tightest spreads but proves it via the Xetra Liquidity Measure, which is publicly available to every market participant, allowing for unparalleled pre-trade transparency.

Another way to facilitate extremely low cost trading is the Xetra Quote Request functionality introduced in April 2016. Enabling market participants to trade large volumes of ETFs on-exchange, but without having to fear market impact. In addition, with the complete service chain – from order routing, trading and clearing down to settlement – Deutsche Börse facilitates additional post-trade cost-efficiency, e.g. through multilateral netting. Moreover, Eurex Clearing acts as central counterparty for all market participants trading on Xetra, eliminating counterparty risk and therefore further adding to cost-efficiency.

The industry is well aware of Deutsche Börse’s efforts and has awarded Xetra numerous times for its ETF offering; in 2015 as “Best Stock Exchange in Europe that contributes to the efficient listing, distribution and trading of ETFs for the ultimate benefit of investors” at the ETF.com Europe Awards, and as “Most proactive ETF exchange in Europe”, amongst other awards, at the Annual Global ETF Awards. Xetra is the reference for ETF trading for a multitude of reasons, and size is only one of them.

 

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