Tuesday, January 21, 2020 Stamford, CT USA — ETFs are making up a growing share of the volume on institutional equity trading desks as institutional investors embrace them as a low-cost and efficient path to market beta, sectors, factors, and other investment exposures.

New data from Greenwich Associates shows that ETF notional trading volume increased from 6.4% of buy-side equity trading desk total volume to 10.4% over the last three years. Most of that volume comes from equity ETFs, followed by ETFs representing credit indices.

Factoring out the 30% of buy-side firms that do not currently trade ETFs, ETF trading volume rose even more, from 8.9% of the total to 14.4% in the last three years. (Market-wide ETF volume is higher than this, reflecting even greater adoption among retail and registered investment advisor (RIA) segments.)

A majority of this institutional ETF flow is executed through sell-side equity trading desks via standard channels, with 55% routed to a firm’s regular high-touch sales trader or via a standard execution algorithm. However, 41% of ETF flow is currently executed via more specialist channels. These include request for quote (RFQ) platforms that aggregates liquidity from multiple dealers, specialist ETF desks that are able to source liquidity in the underlying components and create or redeem new ETF shares if appropriate, and risk traders who are able to commit firm capital and execute the ETF order on a principal basis.

“The decision over which execution channel to use will be based in large part on the liquidity characteristics of the ETFs, which in turn can depend on different factors, including liquidity in the underlying securities, spread, quoted depth of market, and others,” says Shane Swanson, Senior Analyst for Greenwich Associates Market Structure and Technology and author of, ETFs Present New Challenges for Equity Trading Desks.

With ETF flows climbing, a majority of traders express interest in utilizing execution tools specifically calibrated for ETFs. For example, 57% of traders would be interested in using an execution algorithm that is calibrated specifically for these types of securities.

“Given the growing demand for ETFs and the SEC’s new ‘ETF rule’ that makes it easier for issuers to launch new ETFs and improve liquidity, we expect to see a steady stream of new products and strategies that help buy-side traders analyze and execute ETF orders,” says Shane Swanson.