Best ETF Trading Platform for Institutional Investors

There’s something to be said for coming early to the party, says Enrico Bruni, head of Europe and Asia business at Tradeweb, which scooped the Best ETF Trading Platform category in this year’s ETF Risk European rankings. “It gives you the chance to shape the offering,” he says.

Tradeweb’s European-listed ETF platform was launched in October 2012, but it stands on the shoulders of the company’s pioneering multi-dealer request-for-quote (RFQ) protocol, which dates back to 1998. The protocol allows institutional clients to conduct real-time auctions with multiple dealers, and select the best prices at which to transact.

While the company’s heritage lies in fixed income, it eyed an opportunity in Europe’s fragmented ETF market, where no fewer than 26 exchanges list ETFs.

This fragmentation has divided liquidity – making it difficult for institutional investors to trade on exchange in the entire size required. This has led to some two-thirds of ETF trading taking place over the counter (OTC), typically by phone or chat – which is not recorded, preventing institutional investors from seeing the overall size of the market.

“This has always provided a challenge to a secondary European ETF market,” says Bruni. Institutional investors have a difficult task in gauging the full depth of the ETF market, and this has made many reluctant to participate. “What our platform does is aggregate liquidity,” he adds, “allowing institutional clients to achieve levels of pre-trade price transparency that were traditionally more problematic in the OTC market.”

Part of that aggregation of liquidity is achieved by ensuring the key dealers are signed up to the platform – and Tradeweb boasts 20 of the biggest names in the ETF space. But ease of execution is also a priority for the Tradeweb client base, typically consisting of asset managers, hedge funds, pension funds and banks. “We spent a lot of time with customers and liquidity providers to define the timing protocols that are most appropriate for the market, and provide the necessary tools to mitigate risk,” says Bruni.

One such risk is the danger of confusion over exactly which ETF is to be traded – a particular issue in the European ETF market, where the same product is often offered in more than one currency, resulting in multiple listings. “The Tradeweb platform, however, offers the ability to cross-identify and match different types of identifiers,” says Bruni. “That is a big deal for ETFs.” 

Enrico Bruni, Tradeweb

Tradeweb functionality that minimises operational risk also includes alerts for investors selecting anything other than the best price, and a trade-direction-locking feature.

Clients also place a high priority on seamless pre- and post-trade integration with client and third-party systems. “Our expertise in the execution space and the level of service we offer to clients set us apart from the competition,” says Bruni, noting that the company has a team dedicated to the integration of the Tradeweb platform with clients’ order management systems. The platform offers straight-through processing, reducing manual errors and settlement issues.

This integration is proving especially important in light of the new regulatory obligations faced by institutional investors – specifically, the ‘best execution’ requirements strengthened in the EU’s Markets in Financial Instruments Directive II, which will encompass ETFs. These oblige investors to show that they have taken all reasonable steps to obtain the best possible result for their clients. Tradeweb’s post-trade reporting tools, which include audit trails from quote requests through to execution, provide the evidence needed to meet regulatory demands – evidence that is much more onerous to gather from phone calls or chat logs, for example.

Where the Tradeweb ETF platform scores particularly highly, says Bruni, is in its conversion rate. No fewer than 91% of RFQ enquiries result in a buy or sell order, he says. “That gives a sense of the platform being a trading venue and not just a price discovery mechanism. It also shows that the prices that customers get back are very good – it validates the quality of the platform.”

More recently, the growing popularity of fixed-income ETFs created a market demand for increased efficiency in the execution workflow for these instruments. Tradeweb’s Portfolio Composition File Trading Tool, launched in June 2013, addressed this need by making it faster and easier to source, price and trade the basket of underlying bonds necessary to create or redeem shares in fixed-income ETFs.

Bruni says Tradeweb continues to add functionality and features to the platform, most recently allowing clients to switch between ETFs and submit lists of ETFs in a single order. He adds that the company’s presence in other markets offers opportunities in the ETF space. “We’re looking at leveraging liquidity that we have in rates, credit, and derivatives – our ETF platform aggregates liquidity and we see excellent opportunities to play a role in enhancing the overall execution experience in the marketplace.”

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