NYSE Arca losing ETFs to rivals

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For the first time in at least five years, NYSE Arca’s ETF listings have declined from a year earlier, with more than 30 ETFs defecting this month for Nasdaq Inc. and Bats Global Markets. While NYSE Arca is still the industry leader, with 1,543 listings and $ 2.3 trillion in assets, the competition is intensifying following high-profile market failures last year and the departure of some of NYSE’s top ETF talent.

Back-to-back market glitches that rattled NYSE Arca last week, while only a minor hiccup for trading, served as a reminder of past missteps. And it comes at an inopportune time.

While Nasdaq and Bats are nibbling away at its ETF franchise, upstart IEX Group, which gained fame with Michael Lewis’s book “Flash Boys: A Wall Street Revolt,” plans to start competing for lucrative corporate stock listings next year.

“New York can kind of rationalise and say, OK, it’s only a few ETF listings,” said Larry Tabb, founder and research chairman of Tabb Group, a research and consulting firm. “But by the time the big players turn around, the innovators have breached the castle walls.”

NYSE’s competitors have made inroads by offering cheaper or fee-free listings along with other sweeteners, like advertising on Nasdaq’s huge electronic billboards in Times Square. Bats even pays incentives to issuers if certain targets are met. While they have successfully attracted listings, they have a combined $ 200 billion in exchange-traded assets, just a fraction of NYSE’s.

But the big money in ETF listings isn’t in listing fees, but trading volume.

While ETFs can trade anywhere for most of the day, they return to their listing venue when the markets open and close.

Those few seconds are some of the busiest and most profitable trading for the exchange industry, with fees paid by both buyers and sellers, and fewer rebates.

When the competition lures away listings, they also take the valuable opening and closing auctions that go with them.

“The listings business is going to change dramatically in the coming years,” said Bryan Harkins, executive vice president and head of US markets at Bats.

“Our customers’ commitment to NYSE is reflected in our 92%-and-growing market share of listed ETP’s assets under management,” said Doug Yones, the head of NYSE’s ETF business, pointing out that NYSE also got 70% of the largest new funds launched this year.

The gains made by Bats, particularly, have led to an acrimonious dispute about who is the leader in ETF trading. When one ETF left Nasdaq for NYSE in October, a blue banner was hung across NYSE’s famous Corinthian columns proclaiming NYSE Arca to be “The #1 Marketplace for Listing and Trading Exchange-Traded Funds.”

“What they really care about is the volume, and Bats and Nasdaq have done a great job of taking ETF trading flow,” said Eric Noll, president and chief executive of Convergex, a brokerage and trading firm in New York.

Bats also laid claim to the title by adding together ETF trading volume across all four of its platforms.

It is a sore spot with NYSE Arca, which pointed out that they offer the most trading and liquidity on any single exchange.

“We’re No. 1, and we want to stay No. 1,” Yones said at the October opening-bell ceremony in honor of a fund poached from Nasdaq.

ETFs trade like stocks while tracking assets that range from stocks to commodities. NYSE’s acquisition of the American Stock Exchange in 2008, the first US ETF-listing venue, gave it a big head start in the business. However, multiple mergers also left the New York Stock Exchange with disparate technology across its businesses.

Speed and sophistication are essential to successful ETF trading, since the funds must be kept constantly in line with the underlying basket of stocks, bonds, commodities or derivatives that they track. Bats and Nasdaq went after those clients, and Bats also was able to purloin top players in NYSE’s ETF business, especially Laura Morrison, head of NYSE’s ETF listings.

Then came two market failures in summer 2015: The New York Stock Exchange’s systems went down for more than three hours in July 2015, and the exchange and Wall Street frantically worked on a backup plan in case the exchange couldn’t reopen in time for the crucial final moments of trading, when the settlement prices are established for thousands of stocks and then ripple through indexes and ETFs around the world.

The following month, delays in opening some stocks triggered a series of trading halts that caused ETFs to veer wildly from the value of their underlying assets.

After those breakdowns, issuers became increasingly focused on spreading their listings across multiple platforms, so no one failure left them hamstrung.

When BlackRock announced in January that it was moving 11 ETFs to Nasdaq and Bats, the asset manager said diversification was part of their listing strategy.

Many of its new listings have gone to NYSE competitors this year.

That is why it didn’t help when technical glitches rattled NYSE Arca for two days in a row last week, including a 15-minute halt on December 19 and a malfunction on December 20 that left NYSE Arca briefly unable to allow trading on more than 700 securities valued at more than $ 1 trillion.

“They have to play defense now and rebuild their reputation after having all of these issues,” said Mohit Bajaj, director of trading at broker WallachBeth Capital.

Write to Asjylyn Loder at asjylyn.loder@wsj.com

Alexander Osipovich contributed to this article, which was published by The Wall Street Journal

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