For those gray-bearded former floor brokers who would gallop into an exchange specialist’s trading pit and shout, “I’ll buy what’s offered on the screen!”, and were often dismayed when the specialist yelled back, “Go ahead, trade with the screen..but I don’t have that offer anymore!”– you won’t be surprised to know that today’s “screen-based markets”, especially for the majority of ETF products, are not the panacea that electronic market promoters would have you believe.
Beauty is not in the eye of the beholder, if one expects the ‘screen’ to be displaying the real liquidity that’s available.
To underscore that point, we’ve excerpted 2 minutes from the Catherine Cowdery and Pimm Fox Feb 29, Bloomberg Radio 20-minute podcast interview with ETF market specialist Andy McOrmond, the co-head of ETF Trading for liquidity aggregator WallachBeth Capital.
Before you (or after) you click on the logo above, what the extracted clip doesn’t include are the following and particularly poignant points that McOrmond made in the interview when speaking to the topic of ETF market liquidity and transparency of trading screens.
Noted McOrmond, “We love trading system technologies, and embrace the notion that electronic markets can enhance liquidity in an ETF by seamlessly aggregating all bids and offers in a respective product. We also applaud those who have created computer-based algorithms that, when employed responsibly, can “level the playing field” by “sniffing out” arbitrage opportunities between the cash ETF and respective underlying components, and in theory, help narrow bid-offer spreads.”
” Thinly-Traded’ does not mean “lack of liquidity”, regardless of what the screen markets display.”, added McOrmond.
“We can’t emphasize enough that those who provide real, actionable liquidity for large blocks, whether they’re principal market-makers, AP’s, or opportunistic sell-side trading desks, should not, and cannot be expected to broadcast their most aggressive bids/offers on actionable trading screens simply because these “LPs” would be exposing themselves to “professional gamers” who seek to exploit split-second arbitrage opportunities by “leaning on” prices reflected by those primary market-makers.”
This writer’s take-away: However opportunistic the best street-side traders might be, the more significant and reliable ETF liquidity providers are not going to publicly broadcast their most aggressive bids and offers.
The fallacy about the screen markets is based on the “garbage-in, garbage out” theory. Many within the professional trading markets know that technology is a double-edged sword, and institutional investors are often indirect casualties of what some would argue is a market place more akin to a “Transformer-type battle field”, dominated by high-frequency-friendly computers shooting bids and offers through cyberspace, and where 99% of those “orders” are often nothing more than digital chaff or “noise.” Those who commit capital for large block trades simply don’t want to be gamed, and while they provide bid-offer context on screens in order to keep their seat at the table, they reserve their best bids and offers for the vast majority of ETF products within dark pools, which are best accessed via aggregators utilizing high-touch connectivity.