30 January 2023
In the Financial System Stability Assessment of Ireland, the International Monetary Fund (IMF) concludes that market makers play an essential role in the Irish ETF industry.
The subsequent report by the IMF highlights the importance of two prominent market makers, one of which is Flow Traders, and the dependence on them to provide liquidity in the market. These two market makers represent around ninety percent of certain Authorized Participant (AP) activity for sixty percent of all European ETFs domiciled in Ireland.
The IMF’s report poses that the role of these two market makers is too significant and therefore considers the situation a concentration risk. Consequently, the IMF has called for action by the Central Bank of Ireland to increase regulatory engagement with ETF providers. At Flow Traders we believe that key components that have led to the two market makers becoming most prominent have not been taken into consideration as part of this report.
In our view, the IMF has not considered why these two market makers have created a leading role in the industry. This is a consequence of the global scale that these two market makers bring, as well as their efficiency, superior price execution and their specialization within the field. Even though the two market makers play a significant role, this does not mean that other participants are not active in the industry. A combination of the specialization these two market makers bring and the multitude of other market participants has been overlooked in the report. We believe these factors lead to a more economical Irish ETF industry which benefits the end investor.
As one of the two leading market makers as outlined in the IMF report, we find it important that all aspects are considered and we believe the report as it stands has not taken this all into account. The report has a local focus, while the recommendations have a much wider impact than only for Irish supervisors. This leads to, in our opinion, an unnecessary increase of scrutiny on the entire industry. If the IMF is calling for action by the Central Bank of Ireland, we believe that the missing key components should be explored.