The problem is twofold: over-the-counter trades whose volume far exceeds that of ETF trading on exchanges; and an absence of reporting requirements, which limits the transparency of ETF trading volumes and pricing. ETF in Europe can be traded in different currencies on more than one exchange—and on many exchanges, in some cases. This makes it hard to see how much trading is done in total in one ETF.
Lack of transparency in any market inhibits investing, usually because investors can't get reliable pricing information—in this case, how much buying and selling is taking place and what the aggregate price should be. According to figures from BlackRock Inc, the average reported daily ETF volume in Europe was $6.5 billion in August, compared with $102.6 billion in the US. While the US figure represents all ETF trading in the US, BlackRock says, it can't be determined how much of European ETF trading is represented in the latter figure because it only includes trades that are reported—which are trades on exchanges, and some of the OTC trades. ETF providers want more trading of their products on European exchanges and are lobbying the exchanges and regulators for post-trade reporting requirements for the products. Such steps, the providers hope, will increase transparency and investor interest in ETFs. In theory, the more ETFs are traded, the lower their costs will be, as they can be traded in a cost-effective way. Conversely, less trading makes the funds harder to buy at the best price.
In Europe, some 60 per cent of ETF trading is estimated to be over the counter, roughly twice as much as in the US. These are private transactions—usually between large institutions and investment banks—and European Union regulations do not require reporting of OTC transactions involving ETF trades.
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