IU.eu: Are there any other changes you feel are necessary to the market-making infrastructure for ETFs, or in clearing and settlement systems?

Dallmer: Between the exchanges and those involved in trading, there are certainly high-level discussions going on about clearing interoperability. Currently, if you have an ETF listed, for example, on Euronext, but also another exchange, like Borsa Italiana, they would clear via different clearing systems and different central depositories. So a broker-dealer with a short position in one location and a long in the other faces a challenge: how to physically move the security, books and records to close out the position. This is one of the reasons why the European single order book project at NYSE Euronext was possible, because we dealt with Euroclear, and across the Belgian, Dutch and French markets, they collapsed into a single back-office system.

IU.eu: What other innovations might be undertaken to improve ETF secondary market liquidity? For example, could ETF providers print trades on exchange for free?

Dallmer: NYSE Euronext offers a mechanism to enter a cross-order on the central book, subject to certain conditions, and also a separate service called the Trade Confirmation System (TCS), which allows liquidity providers and member firms to bring a cross-trade. Both are useful mechanisms to articulate secondary volume in a particular product, especially in a public company stock, since there's a set number of shares, and this gives you a feel for turnover and liquidity. For ETFs, since they allow new creations and redemptions, share turnover is important, but you have the added reassurance that if you want to place a large trade, you could contact one of the authorised participants and work on getting a creation unit, thus increasing the shares outstanding. It's not free, but the cost of entering a cross-order on the central book or using TCS is relatively low.

IU.eu: How would you compare the overall secondary market liquidity for ETFs in the US and Europe?

Dallmer: Setting aside the sheer magnitude of the turnover in the US, I would say that, generally, it's very similar. In the US, the top 5 ETFs contributed 55% of the overall ETF market turnover during the fourth quarter. In Europe, the top 5 had a 49% share of the overall NYSE Euronext ETF market turnover for the same quarter. Incidentally, on NYSE Euronext in Europe, these were the Lyxor CAC 40 ETF (20%), the Lyxor DJ Euro Stoxx 50 ETF (15%), the SGAM CAC XBear (9%), the iShares EuroStoxx 50 (3%) and the Lyxor Short CAC 40 (3%).

In both the US and Europe, ETFs are a very efficient packaging mechanism for gaining whole-market exposure. A few broad index products dominate in each location. Having said that, not all ETFs are created the same, and not all have the same ease of secondary trading. The underlying index may have an ETF trading, there may be a futures contract and/or an index option. There is an arbitrage interplay when products have all these places to interact, and this tends to feed liquidity. Some ETFs are based on indices that are less tradable. These are designed more as access tools than for their underlying trading liquidity, and tend to have a more buy-and-hold profile.

IU.eu: What ETF product types/fund structures do you expect to grow most in Europe?

Dallmer: Most ETFs up to now have been long-only equity products, and after the 30-40% falls that we've seen, product providers are being forced to innovate to attract new funds, whether it's through new leveraged and inverse funds, or offering new commodity products. But I also think it's healthy to observe the market and to see what's working, and what's not working, and then to innovate to deliver more value to the investor, whether that is via greater collateralisation, or more transparency in what the index or the product holds, or whether that means closing ETFs that haven't gathered assets.

IU.eu: How important is the UCITS III model for European ETFs?

Dallmer: I think that UCITS III has obtained global recognition as a collective investment scheme model, and this makes it very transportable and useful.

IU.eu: How do you see your competitive position versus other European exchanges (both traditional and MTFs)?

Dallmer: Operating a regulated marketplace is an important standard for assuring investors that certain expectations about how things trade, and what trades, are met. All of the exchanges that operate in this way have incremental costs. We do our best to manage that incrementally higher service offering, and we compete with the MTFs and the other, traditional exchanges too. Every one of us is looking at how to streamline technology, how to harmonise processes, and how to make connectivity accessible and cost-effective for the member firms. NYSE Euronext is rolling out something called the Common Customer Gateway, which are common connectivity protocols for member firms. Ultimately, also, the internal cost savings we're creating will be passed on to our member firms.

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