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Exchanges compete to improve ETF investor experience



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The competition among exchanges for ETF business is driving innovations that help make buying and selling shares easier and more attractive to investors, executives say.

Cboe’s BZX Exchange debuted a programme on Monday that allows ETF market makers to receive better payments from the exchange for providing liquidity on heavily traded products, rather than receiving a flat incentive payment for taking on lead market maker duties. This payment, which is capped at 0.39 cents per share, is roughly double the standard rebate that the exchange provides for adding liquidity to the exchange, according to exchange documents.

The programme is designed to incentivise market makers to take on so-called lead market making duties on heavily traded ETFs. Lead market makers trade an average of at least 1m shares per day. They are also held to high standards for ensuring liquidity and tight spreads on products.

The move pits Cboe against NYSE Arca, the dominant US marketplace for listing the largest ETFs. But NYSE has its own plans to attract and retain listings.

Last month, NYSE received approval to lower its annual listing fees for target-maturity ETFs that liquidate at a certain point, as well as for buffered ETFs. Historically, both types of ETFs were charged $10,000 per year, matching the price charged for active ETFs. But under a fee schedule that went into effect on January 12, the products will pay a $7,500 annual fee, the same amount paid by index-tracking ETFs, an SEC notice states.

The fee cuts are a direct response to the “current extremely competitive environment for [exchange-traded products’] listings,” NYSE Arca notes in its rule change requests. ETF sponsors can easily send new ETF listings, and even transfer existing ETFs to rival venues if they feel fees are excessive or find better incentives elsewhere, it notes.

This article was previously published by Ignites, a title owned by the FT Group.

ETF sponsors and investors win from the arms race to add incentives or new features that help boost trading in ETFs, Ed Rosenberg, head of American Century’s ETF business, said a in December interview. “You have three exchanges competing for listings, and they’re competing on the best service model,” he added.

For several years, ETF sponsors have touted their ability to “diversify” their listings across the three major exchanges, NYSE, Nasdaq and Cboe. This diversification drove the platforms to compete more aggressively for their business. And as a result, in 2017, iShares moved 50 ETFs from NYSE to Cboe and Nasdaq. Since then, VanEck, Ark Investment Management, O’Shares and Vident have also moved listings to different exchanges.

Growth in Cboe’s ETF listings business has been driven in part by the attractive incentives that it offers market makers and ETF issuers, notes Laura Morrison, the exchange’s global head of listings. For example, the exchange offered large ETFs free listings until last year.

Cboe is the primary listing venue for about 18.4 per cent of US ETFs, according to Morningstar Direct. NYSE commands a 64.2 per cent market share, while Nasdaq has 17.4 per cent of primary listings.

Giving lead market makers “the best of both worlds” at a guaranteed rate for less frequently traded products and enhanced rebates for highly active ETFs, is a way to “provide the best market quality possible when [an ETF] is listed on Cboe,” she said.

And wooing traders can have an effect on the issuers, too, she added. “To the extent that a market maker is willing to advocate for one listing venue over another, we obviously want that vote,” Ms Morrison said.

NYSE, however, is not standing still in the ETF listing innovation war. In addition to the fee cuts, the firm has sought to use its intellectual property to differentiate itself.

“Our top priority is to operate the best possible ETF listing and trading marketplace, and we work closely with ETF issuers and liquidity providers to enhance ETF market quality,” Douglas Yones, NYSE’s head of exchange-traded products, said.

In December, NYSE Arca received approval to allow active non-transparent ETFs to list directly on the exchange floor instead of on its all-electronic Arca exchange. The exchange said in 2019 that it intended to open its floor to ETFs, but that was before non-transparent ETFs were approved for launch.

The floor, which combines human traders and technology, is “the gold standard equity market model”, Mr Yones said. It could improve the quality of daily opening and closing auction trades for new and low-volume ETFs, he added. NYSE officials did not disclose when the floor trading was expected to open.

Several ETF capital markets executives intend to closely examine the floor-trading model after it debuts because there is no guarantee that it actually would improve trading, they say.

Choosing an ETF’s primary listing venue and lead market maker are often linked, says Michael Castino, senior vice-president in ETF business development in US Bancorp Fund Services. Market makers may prefer an issuer to list a product on one exchange versus another in order to aggregate ETF trades for better incentive payments, he said.

ETF issuers are often attracted to an exchange’s issuer-support programmes, including marketing and education, as well as events like bell-ringing ceremonies. But ultimately, trading quality is the critical factor.

“You can have the greatest ETF on the planet, but if it doesn’t have good trade execution, it’s going to leave people with a bad taste in their mouth,” Mr Castino said.

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‘Digital big bang’ needed if UK fintech to compete, says review




Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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US stocks make gains on Fed message of patience over monetary policy




Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.

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