Institutional investors becoming more comfortable with ETF liquidity, finds Jane Street

Oct 26th, 2018 | By | Category: ETF and Index News

ETF STRATEGY NEWS! ETF Strategy is delighted to announce the launch of ETF Strategy Hub (hub.etfstrategy.com), an on-demand repository of webcasts, videos, podcasts and white papers. Debuting with Special Series on Technology & Innovation in China and the Digital Economy.


Institutions are getting more comfortable with ETF liquidity and increasingly sophisticated about measuring it, according to a survey by liquidity provider Jane Street.

Institutional investors becoming more comfortable with ETF liquidity, finds Jane Street

A vast majority of institutions consider ETFs to be more liquid or just as liquid as three years ago, across a variety of asset classes.

Based on responses from 296 institutional investors and qualitative interviews with 14 buy-side firms, Jane Street found that institutions are trading ETFs more often and in larger sizes – and not just for passive management, but for active strategies, hedging, and liquidity management, too.

Nearly a quarter (24%) of institutional investors reported executing a trade over $100 million compared with 21% in the year prior; in the more mature US/Americas market, 4% of respondents had executed a trade in excess of $1 billion.

Institutional traders also consider ETFs to be more liquid or at least just as liquid as they were three years ago, across all asset classes, including emerging market ETFs (88% of respondents), fixed income ETFs (87%) and developed market ETFs (94%).

Institutions are increasingly looking beyond ETFs to their underlying securities, so-called implied liquidity, to gauge liquidity with 31% of respondents stating this as their main measure of liquidity evaluation. This was followed by the bid-offer spread of the ETF (cited by 25% of respondents), average daily volume of the ETF (23%), the size of ETF AUM (17%), and availability of hedging instruments (4%).

Competitive pricing remains the most important criterion for selecting ETF trading counterparties, with 55% of institutions putting it top of the list. Institutions value competitive pricing twice as much as any other criteria including expertise in complex/illiquid markets (cited by 20% of respondents), ability to trade in large size (16%) and value-add services such as research (9%).

The emphasis on pricing marries up with a year-on-year increase in the percentage of institutions reporting the use of ETFs as part of their core asset allocations: from 25% to 35%. Jane Street notes that as ETFs have become more central to buy-side firms’ investment strategies and, as trade sizes have grown, it follows that pricing would come into sharper focus.

The study also found that independent market makers are gaining traction. Market makers are the top choice of counterparty among buy-side institutions, experiencing an increase of six percentage points since 2017 and now favoured by 35% of institutions. The increased popularity of risk pricing, where trades are executed immediately at a transparent and fixed price, may help to explain this change.

Commenting on the survey, Andrew Upward, ETF Strategist at Jane Street, said, “The results are consistent with what we’re hearing from our conversations with some of the largest pension funds and asset managers in the world. Institutional perception of liquidity is improving, which is driving ETF use in core investment strategies. And we’re seeing larger ETF trade sizes as a result.”

Slawomir Rzeszotko, Head of Institutional Sales & Trading, Europe at Jane Street, added, “Fee compression and a focus on the core have been key themes for ETF asset flows – and similar trends are emerging in ETF trading. Particularly in Europe, the focus on MiFID II and best execution is driving down costs and emphasizing the importance of competitive pricing. Institutions have become more discerning about their trading counterparties and market makers are gaining ground.”

Tags: , , , , , ,

Leave a Comment