Vanguard plugs ‘transformational’ idea for Europe ETF trading venue
Euronext’s plan to consolidate ETF trading on to one of its seven bourses would cut costs, senior executive says
Euronext’s ambitious plans to consolidate the thousands of exchange traded product listings scattered across its bourses would be “transformational” for retail investors, according to Vanguard.
The stock exchange operator is in discussions with market participants about consolidating the 3,300 ETP listings spread across its Milan, Amsterdam, Paris, Oslo, Brussels, Dublin and Lisbon bourses on to one exchange.
Paul Young, head of ETF capital markets at Vanguard, the world’s second-largest asset manager, said “we think the initiative is a very positive development and will be transformational for how retail investors access ETFs at a lower cost”.
“This type of initiative is totally unique in the exchange space,” Young added. “All we have seen since Mifid in the early 2000s is more venue fragmentation within national borders, and very little to support cross-border flows, which mostly impacts retail flows since larger institutions at scale can pay for access to other markets.”
Vanguard, which manages the assets of more than 50mn investors globally, most of whom are retail, maintains that the introduction of Mifid, the EU’s Markets in Financial Instruments Directive, in 2007 led to a “proliferation of new platforms” that increased fragmentation in Europe’s capital markets, Young said.
Europe has “more than 10 times as many exchanges for listings” as the US, and no consolidated tape to bring together real-time data on security prices and trading volumes, which means European ETF investors are at a “cost disadvantage” compared to their US peers, Vanguard said in a white paper published in October.
Young said Mifid was designed to increase competition between exchanges, but no attempt was made to address the issue of fragmentation.
“Euronext have spent years acquiring exchanges but not really made any attempt to create a single venue,” Young said.
Vanguard, in its white paper, found Europe has almost four times the number of ETF listings as the US, 11,925, despite having virtually the same number of ETFs as the US (2,967 vs 3,040) and just one-15th of the trading volume ($2.4tn vs $38tn).
It argued there was “a direct relationship between higher levels of market fragmentation within the European market and higher trading costs in the form of wider bid-ask spreads”.
“For S&P 500 [ETFs spreads] are four to five times wider in Europe. Some of that is down to time difference but the additional costs are down to fragmentation,” Young said.
Consolidating Euronext’s ETF listings on to one exchange could significantly eat into this cost differential.
“We have seen 35 per cent quoted by Euronext in terms of bid-offer spread savings,” Young said.
Retail investors are particularly disadvantaged by the higher cost of trading wider spreads. While institutional investors can shop around for the greatest liquidity and tightest trading spreads, Young said small investors were hit in the pocket if they attempted to do the same.
“Retail investors are locked into their ‘national’ capital markets ecosystem and paying too much to access equities even within the EU,” he argued.
“For example a French investor that wants to trade on a more liquid listing somewhere else even within the EU will pay additional costs to their broker because this is deemed an ‘international’ security. We call these ‘search costs’ and there is a level of protectionism at play that this initiative would signal a way to break open”, intensifying price competition in the process.
Retail investors “will have access to a much larger pool of investors to trade with. We think that will hugely reduce costs.”
Young would not be drawn on which of Euronext’s seven bourses Vanguard would prefer its ETFs to be listed on, although he said the asset manager had a “very strong focus on the UK, Italy, Germany, Switzerland and the Netherlands. That is where we tend to have ETFs listed for the reason that investors have a preference for local exchanges.”
On the face of it that would suggest Milan or Amsterdam would be Vanguard’s preferred option (the UK, German and Swiss bourses are outside of the Euronext network).
To Young, though, the choice of exchange is not that important, so long as it is equally accessible to retail investors everywhere.
Unlike some commentators, such as Bruno Poulin, chief executive of French asset manager Ossiam, and Kenneth Lamont, principal of research at Morningstar, Young is not calling for a single Europe-wide ETF exchange incorporating non-Euronext bourses as well.
“I’m not advocating for no fragmentation or competition,” he said. “In the US, other exchanges can compete for trading activity [aided by] a single consolidated tape.
“Ultimately that is what we would like to see in Europe. These venues can compete with each other,” he said.
Euronext declined to comment for this story but had previously told the Financial Times that “we are committed to addressing fragmentation in the European ETF market to unlock its full growth potential”.