There is a battle going on behind the scenes in the exchange traded fund industry.
The New York Stock Exchange, the previously go-to exchange for ETF listings, is slowly losing ETF market share to Bats Exchange and NASDAQ Stock Market as more fund providers look to diversify their U.S. listings.
The majority of exchange traded products, which include both ETFs and exchange traded notes, are listed on NYSE Arca. According to the NYSE, there were 1,564 U.S.-listed ETPs with $1.88 trillion in assets under management on NYSE Arca as of February 2016, along with 232 ETPs on the Nasdaq and 70 on Bats.
There are currently 1,873 U.S.-listed ETPs with $2.162 trillion in assets from 86 fund sponsors trading on 3 exchanges, according to XTF data.
NYSE Arca has served as the primary listing exchange for the majority of ETFs when listings, including the SPDR S&P 500 ETF (NYSEArca: SPY), were originally found on the American Stock Exchange, which the New York Stock Exchange acquired in 2008.
However, while the NYSE Arca still enjoys the lion’s share of ETF listings, more ETF sponsors are beginning to look at alternative exchanges to list their products and potential provide improved trading opportunities for investors.
“Diversification is an important element of iShares listing strategy,” Samara Cohen, U.S. Head of iShares Capital Markets at BlackRock, said previously in a statement. “It encourages continuous innovation and ultimately improves the client experience. BlackRock maintains strong relationships with all major exchanges, and we thank BATS, NASDAQ and NYSE ARCA for their ongoing commitment to evolve in a rapidly changing marketplace.”
By shopping around to find a primary listing venue, ETF providers can determine which type of exchange has the most beneficial rules and procedures to ensure orderly trades and ETF prices. As the markets have witnessed, ETFs with the most efficient trades are also the more popular, or quick to attract assets.
The recent changes may be a result of the market shake-up in late August last year that resulted in large swings in a number of ETFs. On August 24, trading pauses in 471 individual securities known as LULD halts – limit up, limit down – occurred 1,278 times, which means that many ETFs experienced multiple halts.
BlackRock has stated that delays in the market open during periods of extreme volatility are harmful as they contribute to market uncertainty and alarm investors. On the other hand, the money manager pointed out that BATS and Nasdaq were able to promptly open “in an automated fashion” on August 24 when volatility spiked while NYSE-listed equities were subjected to “excessive delays.”
Many in the industry have argued that the volatility in ETFs in August was a result of structural problems. Consequently, more fund providers may be shopping around different listing venues to find a better fit.
For instance, Nasdaq added 25 new ETF products to its lineup in the first quarter of 2016, including 12 products that ditched the NYSE Arca for Nasdaq – 10 BlackRock iShares and two Van Eck ETFs. The rest were all new product launches from Eaton Vance, Van Eck, Victory Capital, Principal Funds, Vanguard, PowerShares, First Trust and Janus.
Bats is also wooing its fair share of ETF providers, including the recent WisdomTree emerging market and international quality dividend ETFs on Thursday, April 7.
So far this year, the NYSE Arca has added 42 ETF launches, or a 45% share, while Bats had about 31% and Nasdaq captured 24%.
[related_stories]Bats is also growing more serious in its attempt at capturing a greater piece of the ETF pie. For example, on March 29, the exchange operator signed a definitive agreement to acquire ETF.com, a provider of ETF data, news and education, underscoring the exchange’s commitment to the ETF industry and focus on providing content for market constituents.
Bats has also announced the launch of its initial public offering of 11,200,000 shares of its common stock, with an initial share price expected to be between $17.00 and $19.00, according to a statement. Bats shares are expected to price Thursday and begin trading on the Bats Exchange under the ticker symbol BATS.
The exchange operators have also pushed their ETF agenda through incentives programs that would help bolster liquidity in ETF trades. Bats, for example, is paying firms to list their ETFs on its exchange.
“This has our competitors frozen, given the potential cost of responding to this threat and the damage it could do to their corporate listings business,” Chris Concannon, chief executive officer of Bats, told Bloomberg. “Can you imagine NYSE paying GE or Bank of America to list on its market?”
Nasdaq is also trying to one up its competitors, filing with the Securities and Exchange Commission for approval of a new program which would share some of its trading revenue with market makers to bolster liquidity in ETPs. Market makers help generate ETP liquidity by buying or selling shares of the products to keep the funds in line with underlying holdings. If the market makers succeed in providing tighter spreads in ETF trades, investors will likely be more apt to adopt the funds.
“I’m not discounting the attractiveness some may see in getting a cash rebate to choose a listing venue, but what Bats has done appeals only to the largest products,” Jeff McCarthy, Nasdaq’s head of exchange-traded product listings and services, told Bloomberg. “Issuers would rather see programs that are aimed at increasing trading.”
As competition heats up, some NYSE executives that focused on ETFs are beginning to see the writing on the wall. For instance, Steve Crutchfield, the exchange group’s head of ETFs, bonds and options, left the NYSE for Chicago Trading Co. Days after Crutchfield left, Phil Bak, a managing director at NYSE, also resigned and will become chief executive of CSat Investment Advisory LP. Additionally, last year, Bats expanded its ETF listing operation after tapping NYSE veteran Laura Morrison to head its global ETF business.