25 Years ETF's: Interview series #6
25 Years ETF's: Interview series #6 Frank Mohr, Head of ETF Sales Trading, Société Générale
25 years ago, on April 11, 2000, Deutsche Börse made history: It was the first stock exchange in Europe to launch ETF trading. On the occasion of our anniversary, we look back at the experiences of some ETF pioneers.
How has market making for ETFs changed in the last 25 years?
What role did technological progress play here? Today, as then, it is important to have an appropriate trading system to operate ETF market making sustainably. While in the beginning only a few dozen ETFs were quoted, we are now active as market makers for more than 6,000 listings in Europe. To accompany this growth, it is also necessary to make adjustments to the trading system. Without automation, it would not be possible to manage the greatly increased number of ETFs.
Why is the provision of liquidity in the ETF market so important?
Without the support of a market maker, an ETF could not be launched. Every ETF requires at least one market maker who is registered for quoting the ETF. The market maker is obligated, according to the rules of the exchange, to continuously provide bid and ask prices (for buying and selling). These bid and ask prices move close to the intrinsic value of an ETF, which is also continuously calculated by the market maker. This fundamentally distinguishes ETF trading from stock trading. While supply and demand determine the price of stocks, the intrinsic value of the ETF is used to calculate the price of an ETF. The ETF market makers, who are also in competition, thus ensure tight spreads for ETFs on the exchanges.
What influence do global events and market volatility have on ETF market making?
ETF market makers have to consider many factors when calculating spreads on the exchanges. On the one hand, there are the costs for trading the underlying stocks or bonds, creation/redemption costs, taxes, possibly FX hedging, as well as, on the other hand, the assessment of risk. If we are in a market environment with high risk (high volatility), this is of course also reflected in the spreads for ETFs.
What were the most important milestones and biggest challenges in your career in ETF market making?
A very big milestone was certainly the successful transfer of our ETF market making business from Commerzbank to Societe Generale. This transfer has resulted in ETF market making being significantly broader and more robust, and we have established ourselves as one of the leading ETF market makers in Europe.
What trends and developments do you see for the future of ETF market making?
ETF market making is an important part of the ETF ecosystem. Without ETF market makers, ETFs cannot be listed on exchanges. We expect a large number of new ETF issuers in Europe in the coming years. This growth meets a limited number of market makers in Europe. I therefore expect that the service of market makers will become even more important, as well as the possibility of new players wanting to establish themselves in this continuing growing ETF market.