Increased transparency and best execution requirements for exchange-traded funds in the European Union have helped boost trading volumes on electronic venues.

MiFID II, which went live in the EU at the start of this year, required all ETF trading to be reported for the first time in order to increase transparency. Before MiFID II, it had been estimated that approximately 70% of ETF trading in the region was not on exchanges, so it was hard for investors to judge liquidity.

Adriano Pace, head of equities (Europe) at Tradeweb, which provides electronic trading for fixed income, derivatives and ETFs, told Markets Media that European ETF trading volume had risen this year due to both increased market volatility and MiFID II. He said Tradeweb’s European ETF volumes last year were €165.8bn ($187bn), and have risen 43% to €237.4bn so far this year.

“Markets have been more volatile since the first correction in February, when we had a record month of €24bn,” he added.

This record was overtaken in October with €25.8bn, when there was renewed investor nervousness.

Pace said: “Volumes have also climbed as MiFID II has increased transparency in the ETF market and put more onus on the buy side to prove best execution.”

He continued that before MiFID II went live in January, about 70% of non-exchange ETF volume was electronically traded. Since the regulation came into force that has risen to between 90% and 95%.

More clients have also been trading ETFs using Tradeweb’s Automated Intelligent Execution (AiEX) technology, which automates request for quotes. Automating execution helps the buy side increase efficiency, as they face pressure on fees, and also provides an audit trail to meet MiFID II best execution requirements.

“At the beginning of the year 29% of European ETF trades were conducted via AiEX,” added Pace. “As clients increased their comfort level in using the tool, the proportion of automated transactions was 45.4% by October.”

Tradeweb said in a report that notional volume executed on its European ETF marketplace reached €22.6bn in November, the platform’s fourth best performance on record. Nearly 44% of transactions were processed via AiEX.

Pace continued there are still some larger clients who could adopt AiEX, so the proportion of automated trades could increase further next year. In addition, central banks are showing more interest in using ETFs, while retail aggregators and intermediaries find that AiEX fits well with their workflows.

Volumes could also be boosted next year as ETFs are gaining traction amongst Asian clients. Tradeweb has extended trading hours and added ETFs listed in the main Asian markets to its electronic platform.

“One focus in 2019 will be to take our data one step further and stimulate the RFQ dealer selection process using additional liquidity metrics,” said Pace. “We are also looking to provide a more holistic transaction cost analysis product, and to develop a more data-driven approach to trading using machine learning and artificial intelligence.”

Lee Olesky, chief executive of Tradeweb Markets, said in the firm’s 2018 review that the adoption of new trading technologies has enhanced access to markets with data provision continually improving, and increased levels of automation have reduced risks and costs.

Olesky said in the report: “The next shift will be from rules-based algorithmic trading to machine learning in which computers will analyze the data, determine the next trade, and execute seamlessly over robust, resilient and integrated platforms. From our vantage point, we can see the beginnings of this change afoot in other asset classes. As a first step for the fixed income market, all market participants need a strategy for execution and data to inform their core activities.”

Global ETF flows

Total assets invested in the global ETF and ETP industry rose to more than $5 trillion at the end of last month according to ETFGI, an independent research and consultancy firm.

@ETFGI reports assets invested in #ETFs and #ETPs listed globally rise above $5 trillion at the end of Nov,
$60.55 Bn Net new assets gathered in Nov.
58th consecutive months of net inflows
more info at https://t.co/IhVliYTmQt https://t.co/rMriKjja8B

— Deborah Fuhr, ETFGI (@deborahfuhr) December 14, 2018