NYSE, NASDAQ Aim For A Bigger Piece Of The ETF Market

by Trefis Team
Nasdaq OMX Group
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Part of the NYSE Euronext (NYSE:NYX), NYSE Arca, a leading bourse for exchange traded products, is going to launch a program that aims to improve the liquidity of lightly traded exchange funds. The exchange received the necessary regulatory approval from the SEC this month, reports Bloomberg. [1]

With this move, the company seems to be trying to protect its dominance in the ETF segment from NASDAQ OMX (NASDAQ:NDAQ). According to the firm’s latest report, the exchange leads the exchange traded products (ETPs) market of which ETFs are the biggest chunk with a market share of 20.4% in May 2013. [2]

This dominance was challenged by NASDAQ a couple of months ago when it re-launched its PSX platform into a marketplace solely dedicated to exchange traded funds (ETFs) and launched its own liquidity program to gain market share in this segment. [3]

We believe that the ETF market could be a great opportunity for the two exchanges. Also, while both the market players are fighting for market share in this segment, these moves have the potential to grow the whole U.S. ETF trading segment into a bigger market over time.

See our full analysis for NYSE Euronext| NASDAQ OMX

ETFs Are A Big Opportunity

ETFs are the most popular type of ETPs, which account for over 15% of total equity trades in the U.S. The percentage was even higher in 2009, when ETPs accounted for over 20% of total equity volumes, according to data reported by NYSE. [2] This means that a trading venue that is able to dominate this segment will in effect be controlling a large portion of the U.S. cash equity trading market.

The importance of this segment is also demonstrated by the fact that the SPDR S&P 500, which is the world’s largest ETF, was also the most widely traded security in the U.S. in 2012, according to the Financial Times. Along with it, four other ETFs also featured in the list of top 10 most traded U.S. securities by value in 2012. [4]

This trend does not seem to be reversing anytime soon as ETFs continue to attract assets at impressive rates. Year till date in 2013, the ETF category has attracted inflows of over $107.4 billion, up more than 30% from the same period last year. [5]

Going forward, we expect this market to continue growing as investors prefer their low fees structure and they remain popular among younger investors, millionaires, financial advisors and retirement funds. You can read about these factors in detail in one of our previous articles here.

ETF Trading Volumes Could Boom Due To The Liquidity Incentives

Despite the surge in their popularity as a category, one problem that keeps investors and traders away from new ETFs is the lack of liquidity in these securities. As a result, many innovative funds could end up being ignored by the market despite their obvious utility.

With the current initiatives to boost liquidity in such funds, both NYSE and NASDAQ will improve the liquidity of these instruments on their platforms. This will not only increase the depth of the market but also reduce the bid-ask spreads on these securities, thereby making it cheaper for participants to trade in these securities.

We expect these moves to attract more investors and traders to the ETF market and improve the overall volumes in these securities.

How Much Money Could This Growth In Volumes Translate In?

According to data obtained from NASDAQ OMX, a total of 238 billion ETF shares were traded in the U.S. in 2012. ((NASDAQ’s ETF Marketshare statistics, February 2013)) Further, our estimates suggest that NYSE and NASDAQ make $3.18 and $3.19, respectively, as trading fees for every 1,000 shares traded on their platforms. These two estimates are very close to each other and we will use the lower number to estimate the total ETF trading market size.

Using a rate of $3.18 per 1,000 shares traded, we estimate that the current market size of ETF trading is around $757 million. Further, assuming no change in average revenue per trade, this market is likely to grow by around $8 million for every percentage increase in the overall ETF trading volumes, according to our calculations.

Note that the growth could be smaller than our estimate, if the incentives provided by the two companies pull down the average revenue per trade figure itself. However, we believe that such programs do not last forever and can be withdrawn after an initial trading momentum is created. Hence the impact on average revenue per trade is likely to be only transient in nature.

NYSE Has The Lead But It Cannot Relax

As of May 2013, the US ETP daily average turnover on NYSE Arca was approximately $62.7 billion and by those standards, NASDAQ PSX has a lot of ground to cover. ((Monthly U.S. ETF Factsheet, NYSE, May 2013)) However, since we are talking about increasing the volumes in low liquidity ETFs – where NYSE Arca has no particular advantage – the field is open for both the players.

By trying to attract volumes in these securities, the two players are in effect also competing against the off-exchange trading venues that currently control the greatest share of the U.S. ETP market. It should be interesting to see if narrower spreads on the two exchanges is sufficient to pluck volumes from these off-exchange trading venues.


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Source: Monthly U.S. ETF Factsheet , NYSE Euronext

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  1. NYSE Arca Unveils Exchange Traded Products Incentive Program, Traders Magazine, June 11, 2013 []
  2. Monthly U.S. ETF Factsheet, NYSE [] []
  3. Nasdaq ETF liquidity market maker scheme gets go-ahead, ETF Strategy, April 8, 2013 []
  4. ETFs lead US equity trading in 2012, FT, January 8, 2013 []
  5. Record-breaking ETF inflows top $100bn, FT, June 6, 2013 []
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