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Increasing efficiency in the fixed income ETF space

| Tradeweb

The recent announcement that BlackRock and State Street had joined forces with Tradeweb and other global industry leaders to develop a consistent approach to calculating key metrics for fixed income ETFs is the latest initiative aimed at improving the market’s ecosystem and contributing to its growth.

As ETFs are bought and sold like equities, the market-making role for the products has traditionally been fulfilled by equity trading desks. But thanks to the growing appeal of fixed income ETFs, bond desks are becoming more and more involved in providing liquidity in this space. Yet the shift from trading bonds to trading bond ETFs is not necessarily straightforward, given the different cash flow analytics available for each type of investment vehicle. A standardised methodology for the calculation of yields, spreads and duration for fixed income ETFs, identical to the one for the underlying bonds, will make the analysis and evaluation of the products easier and more accurate.

When ETFs were launched 25 years ago, no one could have envisaged their incredibly fast-paced growth in assets, which broke through the $3 trillion milestone last May. Even more surprisingly, a significant proportion of these assets are traded over-the-counter (OTC), particularly in Europe, where liquidity is dispersed across multiple listings and exchanges resulting in a fragmented market.

Multi-dealer OTC electronic execution venues, however, have helped bridge the fragmentation gap effectively and transparently. The Tradeweb European-listed ETF platform, which is about to celebrate its third birthday, provides institutional investors with access to a consolidated pool of liquidity for the entire range of European-listed ETFs, and allows them to put market makers into competition to get a better price. Other features include integrated trade processing, direction locking and identifier matching functionality to minimise the risk of trading errors and substantially improve workflow efficiency.  In addition, post-trade client reporting tools help investors prove “best execution”, which is expected to be a focus for ETFs in upcoming MiFID II regulations.

But we didn’t stop there. Tradeweb also introduced innovation aimed specifically at the fixed income portion of the ETF business. Two years ago, we designed and launched a tool that would make it easier and faster for traders to source, price and trade the basket of underlying bonds needed to create or redeem shares in fixed income ETFs. The objective was a seamlessly interconnected trading experience, where each of the underlying securities is traded in its own marketplace.

Still, we felt that more could be done to encourage even greater institutional adoption of fixed income ETFs, not just around trade execution, but around the availability of data and analytics as well. With that in mind, we introduced trade data reports and dealer axes to our ETF platform earlier this year to increase market liquidity and transparency.  Enhancing the trading infrastructure of the ETF market can only support its growth, and electronic trading venues will certainly play a vital role in the development of the industry.