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ETFplus: segmentation and microstructure

ETFplus: the ETF and ETC/ETN market

ETFplus is the regulated electronic market of Borsa Italiana fully dedicated to the trading of:

ETFs (Exchange traded funds)
Structured ETFs
Active managed ETFs
ETCs (Exchange traded commodities) and ETNs (Exchange traded notes)

i.e. of the instruments that replicate the performance of indices (equity, fixed income and commodities) or single commodities.

ETFs are funds or SICAV subject to a low total annual commission traded on the Stock Exchange like a share whose only target is to track the reference index (benchmark) through a totally passive management.
Listed for the first time in Borsa Italiana in September 2002, they have achieved growing success, witnessed by a considerable increase in the volumes of trading and by the increasingly higher number of new products listed.

On the ETFplus market also innovative ETFs are listed, the so-called structured ETFs, managed according to techniques aimed at pursuing returns that are not only related to the performance of the reference market, but which may also be aimed at the protection of the portfolio value (protective put ETF), participating in a more than proportional manner in the performance of an index (leveraged ETF), inversely participating in the movements of the reference market (short ETFs with or without leverage) and achieving more complex investment strategies such as, for example, the so-called buy-write or covered call strategy.

The ETFplus market satisfies the need to give life to a context where, in addition to ETFs, other also innovative categories of financial instruments may be traded, which, even though they are not funds, have the same operating mechanism. These are ETCs/ETNs, i.e. securities issued to cover the direct investment of the issuer in an underlying (e.g. gold bars) or derivative contracts on the underlying. The price of these instruments is, therefore, directly or indirectly related to the performance of the underlying, exactly like the price of ETFs is linked to the value of the reference index.

Segmentation

Thanks to the ETFplus market, Borsa Italiana has created the ideal context for trading of ETFs, structured ETFs and ETCs/ETNs, with the precise objective of:

extending the investment possibilities of investors, offering a broad range of instruments, which adjust to different risk profiles and permit to increase the efficiency level and the differentiation of the investment portfolio;
protecting investors through the application of clear rules, having the purpose of ensuring high liquidity, low spreads and the utmost information transparency.

Instruments traded on the ETFplus market, even though they share the same operating mechanisms, show their own characteristics and peculiarities. For the purpose of facilitating the investor in the selection activity of those instruments, which better adjust to his risk-return profile and his expectations, three segments are provided, which show the same trading modalities and which are possibly divided into classes:

Open-end index funds segment, divided into the following classes:

class 1: ETF whose reference index is bond based
class 2: ETF whose reference index is equity based

Open-end structured funds segment, divided into the following classes:

class 1: structured ETFs without a leverage effect
class 2: structured ETFs with a leverage effect

Securitized derivative financial instruments (ETCs/ETNs) segment, divided into the following classes:

class 1: ETCs and ETNs without a leverage effect
class 2: ETCs and ETNs with with maximum leverage effect equal to 2
class 3: ETCs and ETNs with leverage effect greater than 2

Liquidity

The liquidity of a financial instrument is supported, as set out in the Borsa Italiana's rules, by the presence on the trading book of both bid and ask prices, with competitive spreads and high quantities offered. The liquidity of instruments traded on ETFplus is ensured by the constant presence on each instrument of:

a market maker, which undertakes the obligations both in terms of minimum quantity to be exposed in bid and offer and in terms of maximum spread between the bid price and ask price. Borsa Italiana monitors the performance of these obligations on a continuous basis.
different market makers which, even though they have no quotation obligations, display on their own account bid and ask prices supplying additional liquidity to the instruments.

Trading hours

ETFplus is a multilateral, order-driven, fast and efficient electronic market, able to handle thousands of messages per second, assuring fast order entering and deletion and automatic contract performance execution. Its trading hours are as follows:

Opening Auction: from 8:45am to 9:04 am plus a variable interval of up to 30 secs, determined automatically on a random basis by the trading system.
Continuous trading: from 9.04 am to 5.30pm
Closing auction: from 5.30pm to 5.35pm plus a variable interval of up to 30 secs, determined automatically on a random basis by the trading system.
Trading-at-last from 5:35pm to 5:40pm.

The contracts are concluded through the automatic matching of bid and ask orders according to price/time priority criteria.
During the continuous trading, orders may be inserted through one’s own intermediary with price limit or without price limit and the modalities may be specified, interalia, of “valid until cancellation” and “valid until specified date”.

In order to ensure the proper operation of the market, as for the shares, maximum limits are fixed to the fluctuation of prices. A maximum limit is established to price variation of the orders inserted on the market compared to the control price (which corresponds to the reference price of the previous day), a maximum limit to price variation of the price of contracts compared with the control price and, finally, a maximum limit to the variation of prices between two consecutive contracts. Such limits vary depending on the segment and the specific class (they are, for example, larger for structured ETFs and smaller for ETFs on bond indices). In case these limits are breached, a volatility auction is triggedered. It lasts 2 minutes (plus a variable interval of up to 30 secs, determined automatically on a random basis by the trading system).

Clearing of contracts is managed in Euronext Securities Milan (the company for the centralized administration, clearing and settlement of the Borsa Italiana) on the second open market day after the execution of contracts, whose final settlement is guaranteed by the Central Counterparty (Euronext Clearing).

The minimum quantity that can be traded is one single share/unit and, therefore, also with very small amounts it is possible to purchase the instruments listed on ETFplus.