The Hub is here.
The Intercontinental Exchange, which owns and operates numerous global marketplaces including the New York Stock Exchange, launched an "ETF Hub" in October aimed at simplifying the often disjointed and complex creation/redemption process that brings shares of exchange-traded funds to market.
The platform, created with the help of iShares parent BlackRock, offers issuers and other ETF market participants key "efficiencies" meant to streamline many of the behind-the-scenes functions involved in trading ETFs, including order management, analytics and instant messaging to help with internal negotiations, the ICE's website says. Most recently, the Hub added new features related to the fixed-income ETF market.
Industry leaders see the centralization as a positive step for the ETF space.
Here's what six of them, including the people who spearheaded the ICE's efforts, have told CNBC's "ETF Edge" about the project:
Ben Jackson, the president of the Intercontinental Exchange, said one of ICE's main goals was "modernization":
"It came about by ICE pulling together a lot of the major asset managers, issuers, market makers and banks ... to design a more modernized solution and infrastructure that underpins such a critical investment tool for investors like you and I that want to get access to a very efficient and effective investing vehicle such as ETFs. So, it's really about modernizing that infrastructure to support the growth that, as you know on your show and all your guests talk about, is just continuing to see explosive growth and demand from the investors. ... It's the communication, it's the negotiation vehicle over instant messaging, it's the transaction platform and the settlement platform that's going to enable the APs and market-makers that are facing off these issuers really make that communication, negotiation and transaction much more simple and effective."
Lynn Martin, president and chief operating officer of ICE Data Services, the company's analytics and technology arm, emphasized the need to de-clutter the ETF issuing process, which she said was often plagued by "delays [and] confusion":
"One of the thought leaders in this space, BlackRock, … came to us to explain to us how bifurcated the workflow is, particularly in the creation and redemption processes. There are multiple different workflows that an issuer has to maintain in order to achieve a single create or redeem instruction today. So, what we looked to do is to look at all the assets we have under our umbrella and package them in a certain way, which would bring together the community in a far more efficient fashion, a centralized location to allow a seamless creation and redemption of these ETF assets. ... While the processes may be standard, the technology that exists today is not. Generally, an issuer maintains their own technology, some of the custodians maintain their own technology, and those technologies really aren't integrated and aren't connected. That is what we're seeking to do through message-based protocols, is to integrate all of the ETF ecosystem from issuers, ETF authorized participants, market makers and custodians in a common, seamless workflow."
Douglas Yones, head of exchange-traded products at the NYSE, said the ICE ETF Hub brings an important element of standardization to the mix:
"[Bringing ETFs to market is] a manual process. You've got to reach out to different parties, you've got to track the assets, you've got to watch them go through the system. The ICE ETF Hub that you mentioned, it's starting to go live. It's been live for about the last month. We're starting to bring more issuers onto it. It standardizes the platform. It's open-source. It's a way to make a super-efficient vehicle of the create-redeem. And so now you can trade the ETF, but you can also create new shares of the ETF and it's simple."
Chris Hempstead, director of institutional business development at IndexIQ, said the move would help everybody in the ETF market:
"We're 25 years in. We've gone from zero to $4.3 trillion in assets, and that would indicate there isn't friction, but to Doug's point, there is an operational process. It involves multiple custodial banks and different logins and things like that, so making it more efficient certainly isn't going to hurt the business at all. ... It's going to make it easier for newcomers to come to the market as ETF either liquidity providers or operational support kind of providers because there's not a whole lot of them out there. There's … only a handful of major firms that are doing this. So, if something like the ICE Hub were to come to market and make it easier for competition, I think that helps everybody."
Andrew McOrmond, managing director of ETF trading solutions at WallachBeth Capital, wanted to see more major players get involved:
"I would like to see the banks get back involved. [If] 10, 15 big banks get back involved in the ETF business, that's good for everybody."
Samara Cohen, BlackRock's co-head of iShares markets and investments, compared the Hub to a "highway" in the ETF issuing process:
"Investors want to trade bond ETFs. ... What's a bond ETF? A bond ETF is a portfolio of bonds that trades like a stock on the stock exchange. Trading of bond ETFs, from 2017 to 2018, was up 40%. It's actually up another 40% this year. So what's happening is, as lots of asset managers seek to meet the demand of investors to participate in bond ETFs, they're creating a bunch of, you can think of it as local access roads to create and redeem bond ETFs. What the Hub is doing — and it's really a market utility that has never existed before — is it's creating a highway to facilitate the manufacturing process for bond ETFs."
