South Korea’s Mirae builds up in European ETF industry

South Korean financial group Mirae has expanded its presence in Europe by buying the region’s third-largest market maker in exchange traded funds.

Mirae is snapping up London-based GHCO, a challenger to the near-duopoly that Flow Traders and Jane Street hold in off-exchange trading of ETFs in Europe.

The move continues a flurry of activity in the fast-growing ETF market by Seoul-based Mirae Asset Financial Group, which has divisions encompassing asset management, life insurance and brokerage services.

In June it bought ETF Securities, one of the pioneers of Australia’s ETF sector. This built on its acquisition of Global X, a New York-based issuer also active in Europe and Asia, in 2018, and its purchase of Canada’s Horizons ETFs in 2011. South Korea-based Tiger ETF is also in its stable.

Mirae also operates market making desks in South Korea and Hong Kong, an ETF trading desk in New York and a small team of fixed income traders in London, but it has no trading infrastructure for ETFs in Europe.

“We have got a major Asian bank trying to meaningfully expand in Europe and in doing so they are genuinely inclined to invest to build a third alternative in what is otherwise a duopoly in market making in ETFs,” said Dan Izzo, chief executive of GHCO, who will stay on in his role.

The deal could raise concerns over a potential conflict of interest, given that GHCO is lead market maker on more than 40 per cent of European ETF listings, according to Izzo, and will now be owned by a parent that is a direct competitor to rival issuers.

GHCO claims to be the largest market maker for on-exchange ETF trading in Europe, with monthly trading volume of $3bn, according to Mirae. But it is a very small player on “over-the-counter” off-exchange platforms such as Tradeweb and Bloomberg, where the vast majority of trading takes place. Market participants said that should assuage concerns.

“I think it’s a good thing. Market making has only a few players and having another one that is better capitalised is a good thing for all players in the ETF market from the issuers to the investors,” said Hector McNeil, co-founder and co-chief executive of ETF issuer HANetf.

MJ Lytle, chief executive of Tabula Investment Management, a bond ETF specialist, said the separation in operations between Mirae and Global X also helps. “They are in a lot of businesses and I would trust that they would run the business separately,” he said.

Lytle said the European ETF market making sector had not fully recovered from the retrenchment of banks such as Deutsche Bank and Société Générale from the sector in the wake of the 2008 global financial crisis, when banks deleveraged and risk appetite drained away.

Deutsche and SocGen have also moved their ETF businesses from their investment banking divisions into their asset management arms, loosening the connection between their market making and ETF operations, Lytle said.

“I’m super happy if GHCO gets an infusion of capital because they do their business well, but they would of course benefit from having even more firepower,” he added.

“The market making space in Europe needs investing in,” Lytle said. “It’s a space that has been squeezed on profitability and we have had people who have left the picture. That means it’s more dependent on entities that are thinly capitalised and more focused on quarter-on-quarter profitability, and if it’s not working for them they can divest.”

Izzo said GHCO had 40 staff, a number that will be increased by a further 10 or so by the new investment.

“Having a new owner like Mirae that has lots of organic flows will help catapult us to greater volume in the OTC business,” he said. “We are arguably a distant third. This is meant to give us what we need to take market share.”

A spokesman for Mirae Asset Securities UK said that “adding an ETF arm at this time presents an opportunity to deploy resources into a well-established firm in a fast-growing market”.

Financial terms were not disclosed.