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Liquidity Provider Signals Collapse In Global ETF Trading

Trading in low cost, passive investment products might be more vulnerable than some thought. Global ETF trading collapsed by 14% in Q3 2017 versus Q2 2017 – and was described as “unusually slow”. Global ETF trading in September 2017 was 24% lower than the same month a year ago.

For those unfamiliar, Flow Traders NV is a global electronic liquidity provider specializing in exchange-traded products (ETPs). The Company continuously quotes bid and ask prices for ETPs listed across the globe, both on and off exchange, in all asset classes. Flow Traders is a proprietary trading firm with offices in the Netherlands, Singapore, the USA, and Romania.

Today’s results from specialized ETF trader, Flow Traders NV (Euronext: FLOW), fell well short of consensus, with trading volume both for the company and the ETF market significantly lower in Q3 2017 versus the previous quarter. The share price rose 1.98%. This from Bloomberg:

[24 October 2017 at 13:54:31 UTC+1] Zero Hedge: Flow Traders Misses on Weak Volumes, Margins]

Flow Traders 3Q Ebitda was 14% below consensus and driven by weaker volumes and margins in Europe, says Morgan Stanley (equal weight).

  • Net was 2% below consensus due to one-off tax rebates
  • U.S. revenue was down 53% Y/y, hurt by weaker volumes and low market volatility
  • 3Q net trading income EU31.7 million
  • Flow Traders expects “declining trend in cost growth to continue in 4Q17 towards the lower end of the guided 15-20% cost growth target range for full year 2017”
  • Flow Traders intends to increase the pay-out ratio to at least 75% of its net earnings over 2017 

The results summary below taken from Flow Traders’ quarterly earnings release shows a quarter-on-quarter decline in the company’s ETP trading (Exchange Traded Products – basically ETFs) of 14% and 9% in Europe and the Americas, respectively. More significantly, the bottom three lines show that the total value of ETF trading fell by 14% and 15% in the Europe and Americas, respectively, and by 14% on a global basis.

From the earnings release:

Flow Traders’ global market share reached over 4% in 3Q17, its highest level ever, while market activity declined further

3Q17 EBITDA margin was 24% as a result of the operating leverage of our business model and very slow market conditions

Co-CEO, Sjoerd Rietberg, commented “Market activity continued to deteriorate in 3Q17 to levels that can be characterized as unusually slow, impacting markets and market participants. Flow Traders remained focused on improving its efficiency and setup, which resulted in further increase in market share.”

Global ETF trading in September 2017 was 24% lower year-on-year – see the chart below from the analyst presentation.

That's a lot of red for a period, we are told, is the renaissance of passive index investing.