Traders are concerned with growth of passive investing cost pressures – SIX Trader Survey

The vast majority of European traders have observed a shift from active towards passive investing In the latest Trader Survey conducted by SIX, over 88% of respondents have confirmed this development – and 72% expect this shift to continue. Highlights include:

  • 88% of traders have seen a shift from active towards passive investing and 72% expect the level of passive investing to rise further next year.
  • More than 85% of traders expect a rise in passive investing could provoke change in global markets, but only 40% see this development as positive for their companies.
  • Regulation, such as MiFID II, will be by far the biggest challenge in the next 12 months.
  • Trading activity in 2018 will mainly be driven by the actions of the ECB, while regulation is expected to have more influence than Brexit.

Traders also voiced a very homogenous opinion of the resulting effects. A staggering 85% believe that a further rise in passive investing could provoke changes in global markets. Only 40% of European traders see the rise in passive investing as a positive development for their companies.

Traders said the main drivers of passive investing were cost-efficiency (44%) followed by the looming introduction of the MiFID II regulation in January 2018 (31%), while the trading environment (17%) is not expected to strongly influence the balance between active and passive investing. However, traders raised concerns about the trend with 44% saying there was a risk to price formation from current levels of trading in passive strategies.

A major issue identified by 74% of traders was the lack of liquidity in global markets. The fixed income sector stood out with 34% citing liquidity issues, followed by the equities sector (26%). Unsurprisingly, given the rise of passive investment, only 3% saw a lack of liquidity in the ETF/ETP segments.

The biggest challenge facing traders in the next 12 months is regulation, highlighted by 73% of respondents, far higher than the 55% who named regulation as their top concern in the last survey of SIX in April 2017. The actions of the European Central Bank were named by 46% of traders as being the most important factor driving trading activity next year followed by “MiFID III” (24%), Trump (16%) and Brexit (11%).

Despite uncertainty in their world the survey found that traders were more optimistic about employment prospects than in the last SIX Trader Survey. Some 61% said their company would employ about the same or more people in three years’ time compared with 48% last time.

Tony Shaw, Director London office, SIX Swiss Exchange, said:

Our survey results show the rise of passive investment is set to continue, but there are concerns about what this may mean for global markets. At the same time, there are plenty of other challenges for traders on the horizon – the biggest being regulation coming into effect in 2018.

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