Goldman Sachs Takes on Flow Traders, Jane Street in Europe ETFs

(Bloomberg) -- Goldman Sachs Group Inc., a minnow in the world of European exchange-traded funds, is going head-to-head with Flow Traders NV and Jane Street Financial Ltd., the two biggest traders of the securities.

The bank started offering quotes on the two biggest off-exchange trading venues in the last few weeks, according to Elizabeth Martin, the Goldman partner who runs equity execution services in Europe. It will start trading ETF securities, which track indexes of shares, commodities or bonds, on stock exchanges as early as the fourth quarter.

European ETF trading is attracting interest from banks and speed traders alike thanks to a surge in trading activity at the beginning of this year. Fund managers are shifting some of their ETF trades to off-exchange venues known as request-for-quote platforms because of tougher rules on reporting introduced as part of the European Union’s overhaul of market regulations, known as MiFID II.

"We’d like to be top three in ETFs," Martin said in an interview. "We’ve been investing in the business for a few years now and in the past few weeks have become fully automated.”

Becoming a top-three trader of European ETFs would put Goldman in direct competition with Flow and Jane Street.

European Momentum

“More competition and transparency supports trading," Flow Traders said in an email. “The remarks made by Goldman Sachs, which has already been present in the European ETF ecosystem for years, confirm that momentum is growing in Europe for ETFs.”

Flow Traders, which accounts for more than 20 percent of all ETF trades in Europe, saw activity increase so much in the first six weeks of 2018 that it told the market it had already beaten its record quarter for trading income by more than 30 percent.

A spokesman for Jane Street declined to comment.

Goldman’s role in the European market had mostly been limited to trades arranged over the telephone and block trades. At the end of February, people familiar with the matter told Bloomberg that Goldman had bid for Commerzbank AG’s market-making arm, which includes its ETF operation, one of the five biggest for European securities.

Should the U.S. firm beat a rival bid from Societe Generale SA, the deal would propel the New York-based bank the third-largest trader of European ETFs.

Goldman accounted for 5 percent of trading volumes -- about 1.2 billion euros ($1.5 billion) -- on off-exchange trading venue Tradeweb LLC in February, according to Martin.

The major ETF traders all have a specialism. Flow Traders specializes in harder-to-price ETFs, while Jane Street is well known for fixed-income ETFs. Goldman plans to compete with them by relying on a larger inventory of securities.

“Most of the demand we see from clients are on ETFs with global exposures. So, to be a serious player, you have to develop the technology to price ETFs 24 hours a day within seconds, and manage global risk and inventory,” Martin said. “That’s our specialty.”

To contact the reporter on this story: Will Hadfield in London at whadfield@bloomberg.net.

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Darshini Shah

©2018 Bloomberg L.P.