market making for exchange traded fundsexchange traded funds are open‑ended investment funds that...

Market Making for Exchange Traded Funds

Since the start of the new millennium, exchange traded funds (ETFs) have experienced phenomenal growth in demand. Combining the liquidity of shares with the diversification benefits of pooled funds, ETFs have rapidly become the investment vehicle of choice for both institutional and private investors.

Commerzbank is playing a key role in this fast‑growing market. Through our powerful trading platform, we are helping to ensure the liquidity, access, and efficient, low‑cost trading that are key to successful ETF investing.

Commerzbank – your trusted partner in the ETF market

Contents

04 ETFs – the 21st century way to invest

05 Features at a glance

06 Where liquidity meets stability

08 One-stop ETF trading for our clients

10 Commerzbank – your global partner in Europe

3Market Making for Exchange Traded Funds

Source: Deutsche Bank AG, as at 31.12.2015.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

300

600

900

1,200

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Equity Fixed Income Commodity Number of ETFs*Other

€ million Number of ETFs

*Number of ETFs at the end of the year is net of delistings for the period

Invest in a fund, trade like a shareExchange traded funds are open‑ended investment funds that can be traded on a stock exchange throughout the business day. To date, the vast majority of ETFs have been structured as passive funds, designed to replicate – rather than outperform – a particular market index’s performance.

ETFs have attracted massive popularity among both institutional and retail investors as a low‑cost, liquid alternative to invest across a diverse range of markets, sectors and asset classes, including equities, commodities, bonds, currencies and credit.

Over the last 12 years the number of ETFs in Europe has risen from 100 to more than 1,500 different funds (see chart below). The European ETF market registered record growth in 2015, growing by circa 25 percent, and assets under management in ETFs now amount to 421 billion euros.

A unique combination of liquidity, flexibility and simplicity has made ETFs an essential tool for both professional and private investors worldwide.

ETFs – the 21st century way to invest

European ETF asset growth by asset class

4 Market Making for Exchange Traded Funds

ETFs allow investors to gain or reduce exposure to a whole market or asset class in a single transaction, making them highly suitable for both long‑term as well as tactical investment asset allocation.

Simplicity

Whereas a conventional fund is only priced and traded at a fixed time each day, an ETF can be bought and sold at any time while the relevant exchange is open, including intra‑day trading. Like shares, ETFs can be ‘shorted’ to take advantage of falling prices, traded on a stop‑loss or stop‑limit basis to manage risk, or large trades can be time‑ or volume‑weighted to reduce market impact.

Flexibility

The proliferation of ETFs has resulted in increased volumes on exchanges. Market Makers provide liquidity to the secondary market. The primary market ensures supply when demand is high. This makes ETFs appealing for gaining exposure to both developed markets and less liquid emerging markets.

Liquidity

ETFs offer exposure to a wide variety of asset classes, including equities, fixed income, commodities, money markets and currencies. Practically any index can be the basis for an ETF (either using physical or synthetic replication).

Market access

The Total Expense Ratio for ETFs tends to be low and there are no upfront or redemption fees in the secondary market. As with trading shares, investors usually incur a brokerage fee when buying and selling an ETF.

Cost

Features at a glance


Where liquidity meets stability

We are committed to our role as a reliable Market Maker in both primary and secondary ETF markets.

Essential market-making strengthExperienced, reliable Market Makers such as Commerzbank are crucial to the successful growth of the ETF industry and the ability of ETFs to be priced and traded throughout the business day.

As a Market Maker, Commerzbank has two important roles in the ETF market:

• In the primary market, we operate as an ‘Authorised Participant’. This involves trading directly with the ETF provider in order to create or redeem fund units. In order to create ETF units, we deliver a basket of shares in the same weighting as the fund’s index to the ETF provider and, in return, receive back units in the ETF. When shares are redeemed, the same process takes place in reverse.

As ETFs are open‑ended, the number of units in circulation increases and decreases in line with investor demand. Reliable Market Makers are therefore crucial to ensure a sufficient supply in times of high demand. The primary market is also used by large‑scale investors who prefer to trade at the fund’s Net Asset Value (NAV) to make sure they get an officially published price.

Why Commerzbank

• Global network of relationships with investors and

leading ETF providers

• Long-standing experience of providing liquidity in

both listed and OTC products

• Electronic trading platform support for over 150,000

listed products and funds

• Advisory teams to provide greater value to your

investment decision-making

The primary market The secondary market

ETF Provider

Exchange

Investor

Commerzbank Authorised Participant

and Designated Sponsor

Commerzbank’s role in the ETF market



• In the secondary market, we help ensure liquidity in ETF units so that investors can buy or sell their chosen ETF on a given exchange at any time during the trading day. This means, we are responsible for pricing ETFs throughout each trading day in line with the NAV of its underlying assets.

To operate in the secondary market, Commerzbank has to be approved as a ‘Designated Sponsor’ by the relevant exchange. To ensure a high quality service for investors, a Designated Sponsor has to give certain commitments, including:

– a stated maximum bid/offer spread – a stated minimum size for quoted buy/

sell volumes – provision of prices on an ongoing basis

Commerzbank is approved as a Designated Sponsor on several major stock exchanges in Europe and Asia.

Serving more diverse markets As ETFs venture into more diverse and potentially less liquid assets, Market Makers must be able to demonstrate that they can price and trade ETFs efficiently – whatever the state of the underlying market.

We believe this is why Commerzbank is increasingly the partner of choice for Europe’s ETF market participants.

Xetra Deutsche Börse Frankfurt

Borsa Italiana Milan

London Stock Exchange

NYSE Euronext Lisbon

OMX Stockholm

NYSE Euronext Paris

SIX Zürich

One-stop ETF trading for our clients

A leading Market Maker for European ETFsCovering a wide spectrum of ETFs across multiple European exchanges, we aim to be the one‑stop shop for ETF trading for institutional investors.

Robust trading platformOur strength in the ETF market is driven by our trading platform. Developed over a 20 year period by proprietary technology teams, the platform delivers:• both on‑exchange and over‑the‑counter (OTC) trades for institutional

and retail clients• consistently tight spreads and intra‑day liquidity on more than 150,000

products, including ETFs, notes, certificates, shares and mutual funds• proven liquidity and stable pricing even during times of extreme market

volatility, i.e. through recent financial, geo‑political and natural events that caused major market dislocation

Economies of scaleBy combining trades for all products and funds on a single platform, our clients benefit from substantial economies of scale. For example, by pooling all trades into a single system, we can net trades off against each other and therefore offer the potential for reduced transaction and hedging costs.

We continue to invest extensively in our ETF trading capabilities to ensure we offer one of the most efficient and reliable platforms in the sector.

Advice on ETF strategy

Order execution is only one element of our role as

Market Maker. Our teams of product specialists also

partner closely with clients to discuss how a

particular ETF works and which product might be

best suited to their needs or those of their own

investment clients.

We can also advise on the most appropriate ETF

trading strategy, given a client’s risk profile or

investment objectives.1

1 Advisory services not available from and into UK or Asian countries.


Long‑standing experience, a robust trading platform and economies of scale have made Commerzbank the partner of choice for ETF participants across Europe.

One-stop ETF trading for our clients

“...by pooling all trades into a single system, we can net trades off against each other and therefore offer the potential for reduced transaction and hedging costs.”


Commerzbank – your global partner in EuropeProven expertise in exchange‑traded products.

For over two decades we have been one of Europe’s most active participants in creating, managing and providing liquidity in innovative investment solutions, including notes, funds, certificates, warrants and exchange‑traded products – as well as a leading exponent of index construction.

Today, we offer our investment partners an extensive amount of experience in providing pricing, liquidity and stable connectivity in all market conditions – and for an ever‑increasing range of markets and asset classes.

To learn more, email the ETF Sales Trading team at [email protected] or visit us on www.etf.commerzbank.com or call us:• London: +44 20 7475 1759• Frankfurt: +49 69 136 22088• Hong Kong: +852 3988 0801


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11Category

Marketing Disclaimer

This document has been created and published by the Commerzbank AG, Frankfurt/Main or the group companies mentioned in the document (“Commerzbank”).

This is a financial promotion/marketing communication (together “communication”). It is not “investment research” or “financial analysis” as these terms are defined in applicable regulations and has not been prepared by a research analyst. The views in this communication may differ from the published views of Commerzbank Corporate Clients Research Department and the communication has been prepared separately of such department.

This communication may contain short term trading ideas. Any returns or future expectations referred to are not intended to forecast or predict future events. Any prices provided herein (other than those that are identified as being historical) are indicative only, and do not represent firm quotes as to either size or price.

This communication is for information purposes only. The information contained herein does not constitute the provision of investment advice. It is not intended to be nor should it be construed as an offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this communication and will not form the basis or a part of any contract. Potential counterparties/ distributors should review independently and/or obtain independent professional advice and draw their own conclusions regarding the suitability/appropriateness of any transaction including the economic benefit and risks and the legal, regulatory, credit, tax and accounting aspects in relation to their particular circumstances. Levels, bases and relief from taxation may change from time to time.

Any information in this communication is based on data obtained from sources believed by Commerzbank to be reliable, but no representations, guarantees or warranties are made by Commerzbank with regard to the accuracy, completeness or suitability of the data.

The past performance of financial instruments is not indicative of future results. No assurance can be given that any financial instrument or issuer described herein would yield favourable investment results.

This communication is intended solely for distribution to Professional Clients and/or Eligible Counterparties of Commerzbank. It is not intended to be distributed to Retail Clients or potential Retail Clients. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this communication.

Commerzbank and/or its principals or employees may have a long or short position or may transact in financial instrument(s) and/or securities referred to herein or may trade in such financial instruments with other customers on a principal basis. The information may have been discussed between various Commerzbank personnel and such personnel may have already acted on the basis of this information (including trading for Commerzbank’s own account or communication of the information to other customers of Commerzbank). Commerzbank may act as a market maker in the financial instruments or companies discussed herein and may also perform or seek to perform investment banking services for those companies.

No part of this communication may be reproduced, distributed or transmitted in any manner without prior written permission of Commerzbank. This communication or the manner of its distribution may be restricted by law or regulation in certain countries. Persons into whose possession this document may come are required to inform themselves about, and to observe any such restriction.

By accepting this communication, a recipient hereof agrees to be bound by the foregoing limitations.

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market making for exchange traded fundsexchange traded funds are open‑ended investment funds that...

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