The exchange-traded funds ecosystem was the focus of the pre-lunch keynote Thursday at WBR Equities Leaders Summit in Miami.

Joe Mahoney, Institutional Sales & Trading at quantitative trading firm and liquidity provider Jane Street, discussed the latest products and regulations and addressed their wider impact on traditional asset management.  

Mahoney cited a litany of statistics from a recent Jane Street survey of institutional investors, that show ETFs continue to gain traction.

“Investors are becoming increasingly comfortable with ETF liquidity,” Mahoney said. ETFs in turn are “experiencing more of a home in the core part of institutional portfolios, whereas traditionally they had been on periphery” where they were used tactically and/or for liquidity and risk management, he said.

In 2018, 35% of institutions polled by Jane Street said ETFs are a core part of their portfolio, up from 25% just last year.

The emergence and expansion of the ETF market has been a multi-year evolution. About 25% of equity trading in in 2018 has been via ETFs, up from high single digits in 2004. On a notional basis, more than $2 trillion in ETFs trade per month on average.

Mahoney noted the ETF market is top-heavy, as trading in the 50 biggest ETFs represent about 75% of total ETF dollar volume traded. The ultra-liquid ETFs at the very top of the rankings — SPY and QQQ for example, trade very similarly to equities.   

ETF liquidity is as good or better than it was three years ago, according to the majority of institutions. In developed markets, 94% are positive about liquidity.

ETFs below the top tier need typically need some finesse to trade efficiently, and institutions are evolving in how they source liquidity.  More firms are “looking beyond surface-level data” and incorporating a multi-faceted approach to pre-trade analytics, diving deeper into metrics such as the bid-offer spread, average daily volume, and the size of the ETF, Mahoney said.

Institutions are also decreasing reliance on manual trading processes, such as chat and phone, and trading more electronically. One notable trend is the emergence of Request for Quote (RFQ) protocol, which Mahoney said now makes up about 5% of ETF volumes traded off exchange, up from about 0% three years ago.