Vertical integration is the hottest trend in indexing and exchange-traded products, and no area of the business has embraced that more readily than Wall Street itself.
Recent deals by the InterContinental Exchange Inc., Nasdaq Inc. and BATS Global Markets Inc. — the three primary listing venues for U.S. ETPs — signal the importance that stock exchanges place on the growth of the ETP ecosystem, from index construction and investing strategies to pricing data and even advertising.
Their activity is part of the global consolidation around market data, indexes and exchanges as ETP assets worldwide topped $3 trillion at the end of March, according to London-based ETFGI LLP.
Assets in the nearly 1,900 U.S.-listed ETPs topped $2.2 trillion on April 22, according to research firm XTF Inc. The seemingly ceaseless advance of these figures, supported by 87 issuers and 116 index providers, compels the U.S. exchange owners to seek ever more prominent roles in fostering and supporting successful listed products.
(The global flurry for market data and index-related businesses also has fueled a host of international transactions, including the $5.5 billion purchase of Markit Group Ltd. by IHS Inc. and the pending merger of Deutsche Bourse AG and the London Stock Exchange PLC, which both have previously acquired index firms and index-related businesses.)
In the U.S., NYSE Arca, a unit of InterContinental Exchange's NYSE Holdings LLC, dominates in listings market share, but competition is high for trading volume. NYSE Arca lists 83% of U.S. ETPs, but accounts for 24% of trading volume. (Some 34% of ETP trading volume occurs over the counter, according to XTF.)
Not far behind on trading volume across their several platforms, both Nasdaq and BATS are ultimately angling for listings and related revenue — licensing, pricing, etc. — to bolster their competitiveness with NYSE Arca, which has garnered 43% of new ETP listings in 2016.
Issuers have been testing the waters at Nasdaq and BATS, launching some new products on those exchanges as well as changing course midstream.
In February, BlackRock Inc.'s iShares moved 11 products off NYSE Arca, expressing the need for “exchange diversification.”
Wheaton, Ill.-based First Trust Advisors LP also has shifted many of its 101 ETPs to Nasdaq, joining its largest, the $3.4 billion Dorsey Wright Focus 5 ETF. That sector rotation fund is based on a methodology from Richmond, Va.-based Dorsey, Wright & Associates, which was purchased by Nasdaq in January 2015.
Nasdaq is also adding options market International Securities Exchange Holdings Inc. which provides indexes to many ETPs, including 2015's breakout HACK, the $700 million PureFunds ISE Cyber Security ETF, currently listed on NYSE Arca.
“There are many opportunities to serve the ETF market,” said Jeff McCarthy, vice president and head of ETP listings at Nasdaq in New York. “These acquisitions directly expand the breadth of what we can offer.”
Primary listings are the gateway to revenue through listing fees and trading on the opening and closing auctions.
The recently public Lenexa, Kan.-based BATS is attempting to turn the listing game on its head, offering to compensate issuers up to $400,000 per year based on trading volume. (Currently, only the nine most-traded products would qualify and all but one — the PowerShares QQQ — are listed on Arca.) And BATS also has been piloting an incentive program for market making in certain listings.
Observing the quiet period around its initial public offering, BATS executives were unavailable for comment.
In filings with the Securities and Exchange Commission, BATS does not specifically isolate ETP-related revenue, but does indicate the ICE's recent purchase of Interactive Data Corp., which provides intraday net asset value calculations for fixed-income ETPs, would increase that company's competitive advantage. ICE's NYSE Arca is the primary provider of equity ETP iNAVs.
But revenue from ETPs does not stop at listing and trading. BATS recently purchased ETF.com, a top site for information and data on ETP listings and investing strategies, with about $3 million in annual revenue, according to SEC filings. And last May, BATS hired Laura Morrison, a longtime NYSE executive, as its senior vice president and global head of global exchange-traded products.
While Nasdaq and BATS have made no secret about their assault on NYSE Arca, Doug Yones, head of exchange-traded products at NYSE in New York, contends that his business is hardly resting on its laurels.
“NYSE, with Interactive Data, offers truly comprehensive services for ETP issuers, from index construction and calculation to listing, distribution and marketing support,” Mr. Yones said. n