Growing ETF volumes in Europe and retail participation are fuelling demand for more sophisticated algo execution, says Eoin Cody, index equity portfolio manager at Vanguard. Speaking to Trader TV, he discusses how ETF algos have evolved over the past couple of years, including the rise of new algo providers, data sources and on-screen liquidity. In this episode, Cody also unpacks where he sees advancements in algo models, performance measurements and execution tools set to support the next phase of development of ETF market growth and algo development.
Interview
Josephine Gallagher – Welcome to Trader TV This Week. Today I’m joined by Eoin Cody, index equity portfolio manager and trader at Vanguard, to discuss the main topics and events shaping markets and trade execution. Eoin, it’s lovely to have you on. Thank you for joining us.
Eoin Cody – Hey Jo, pleasure to be here. Thanks for having me on.
Josephine Gallagher – So we’re here to talk about ETF (exchange-traded funds) algos. So there’s been a growing volume of ETF trading done via algos. Can you tell us what’s behind that shift, and how have ETF algos evolved over the past couple of years?
Eoin Cody – Yeah. So the shift is great. I think from a buy-side desk, it’s great to see more and more participants coming in offering these bespoke ETF algos. If you looked at it maybe two to three years ago, there was a very limited amount of access when it came to ETF algos generally. So the shift is moving in the right direction, where you see more than two or three becoming more like five or six now. So they are the conversations that we are having around providers offering these algos. I think when you look at it, it reminds me of where we were a couple of years ago on derivative execution. So futures trading through their algos, and the differences that we’ve kind of come from there till now. So just for context, they were a little bit more copy and paste from the single stock equity algos. We’re seeing that the futures algos have come up a lot a long way since then, and are performing as expected. ETFs are in a similar bracket, albeit maybe a couple of years behind. But certainly engaging with the buy sides like ourselves and my peers to make them better. The other thing is that you can’t talk about ETFs in Europe without talking about the massive surge in volumes generally. So overall, doubled in the last two years. You know, on-screen liquidity is moving towards 35% from 25%. So it’s not all algo usage. You know, the adaptation from retail investors is huge, and flow begets flow, so more and more people trading on screen helps these algos perform the way they should do.
Josephine Gallagher – Excellent. So we’re talking about ETF algos today. So how should buy sides think about ETF trading, whether it be via RFQs (request for quotes) or algos, as you said? And what are some of the challenges in trying to accurately measure performance across these different approaches?
Eoin Cody – Yeah, look, I think buy-side traders should be looking at the usage of ETF algos as well as RFQs as just different tools in the toolbox. You know, we’ve got an additional tool now, which is algo usage, which wasn’t there maybe five years ago. But of course, RFQ is still going to be the majority of, you know, dollar notionally traded through that. We should look at them as complementary to each other and not against each other. I think we can use ETF algos for a certain type of flow, and we can use the RFQ network through a different type of flow. So definitely not as competitors, but as different tools in the toolbox, and the more tools, the better. You know, you have to look at the type of flow. You have to look at which one suits each other. But ultimately, they’re both working in tangent to offer a really nice delivery for us as buy-side traders, which eventually passes back down lower costs to the end investor. You mentioned TCA (transaction cost analysis) and how we perform, how we measure the performance of these. It’s very important. You can’t really compare an execution from an ETF algo versus, you know, an immediate risk transfer on a risk trade. They’re two very different things. So we’re not really comparing apples with apples. But the one thing I would say is that when you know we see the progress of these algos over the next couple of years, it’s important from our desk to look at it and how they perform and how they’re measured, and that’s a bit of a challenge. But we’ll get there. You know, the challenge is probably driven by the fact that there aren’t that many providers in the market currently. If I look at it from what we still do on our single stock equity execution, we measure brokers against each other based on performance. You know, there’s a wide range of brokers we can choose from. At the moment, there’s a limited amount of ETF algo providers, but if we get to the point where there are more, of course, we can kind of adapt that type of performance measurement.
Josephine Gallagher – Understood. And how do you see new data sources and changes to transparency regimes, such as European and UK consolidated tape, shaping ETF trading and algo development?
Eoin Cody – Yeah, it’s going to play a huge part. If you look at the US, where it’s relatively straightforward compared to Europe, you know, trading not only just ETFs but single stock is highly fragmented. In Europe, for example, let’s say on one of our ETFs, we might have two listings, which equally have multiple share classes. So when I’m interacting with that ETF, the actual on-screen liquidity is not a fair representation of what’s available, and that’s because of the fragmentation. So steps moving towards you know, consolidated tape in Europe are going to hugely help us look at what’s actually available and addressable. But there’s still a bit of work to do there to get more, like let’s say, the US market, where it’s much easier to see where that true liquidity lies.
Josephine Gallagher – Understood. And now, looking ahead, where do you see the next big phase of development in ETF algo trading?
Eoin Cody – Yeah, I think the developments are going to lie with more and more participants coming to the table with solutions. I think, you know, as I said at the start, there’s plenty of buy-side roundtables where we’re helping shape this, working with the providers to tell them what we would like to see. So things like the introduction of fair value models, how the ETF performs, will be big. But you know, the future is bright in Europe when it comes to ETFs, all things. You know, you see a lot of participants being added to the market, whether they’re market makers coupled with sell sides offering bespoke ETF algos. You know, with the combination of what I mentioned earlier on around the, you know, the surge in retail trading. You know, flow begets flow. So more people are trading on screen. The more people using ETF algos, the more we’re going to see this grow. So those innovations are big, but I think the main one, which is kind of you know, everyone’s talking about, is just the huge surge in ETF trading in Europe generally, and we need to kind of you know continue to support that. Continue to help educate people from, you know, maybe sitting on some savings accounts and moving them towards investing if the right appetite is there, and that’s the kind of retail push, and that’s what we’re seeing in Europe now is that a huge adaptation from people trading ETFs. So you combine that with buy-side tools such as algos and just the additional sophistication that comes with RFQ network through the market makers. You know, the story is really positive and really good in Europe, and we’re happy to help shape that where we can.
Josephine Gallagher – Brilliant, Eoin. Thank you very much for joining us.
Eoin Cody – Thanks, Joe.
Josephine Gallagher – I’d like to thank Eoin for his insight, and of course, you for watching. This has been Trader TV This Week.
