For all the stories about the cost of implementing MiFID II, we are starting to see some tangible advantages emerging. Among them is improved liquidity in Europe’s ETF market.
Until MiFID II came into force, much of the trade in ETFs was next to invisible.
Because there was no requirement for firms to disclose over-the-counter (OTC) trades.
Around 70% of ETF trades in Europe have typically been done OTC rather than on-exchange. Institutional investors have large ticket sizes – typically EUR 3.5m – and in Europe at least they are more comfortable trading OTC. The average on-exchange trade is less than EUR 500,000.
This lack of transparency meant it was very difficult to gauge the liquidity in a particular product. Now all trades are printed, irrespective of whether they have been done on-screen or OTC.
The upshot is that ETF liquidity appears to be better than many had realised. This is helping to feed demand – which in turn should boost liquidity further. It is also helping to reduce bid/offer spreads.
There are other factors at work, too. It is not just about MiFID II.