Tag Archives: etf market makers


Deutsche Börse Gets Into ETF Block Trades

(MarketsMedia)–European exchange-traded fund (ETF) issuers have welcomed a new service from Deutsche Börse which aims to make it easier to trade large ETF orders on the German exchange.

Deutsche Börse has launched Xetra Quote Request which allows investors to send quote requests for large orders to all registered market makers of a selected ETF, rather than having to negotiate ETF transactions bilaterally over-the-counter or through request-for-quote systems.

The market makers respond by updating their quotes in the Xetra order book, Deutsche Börse’s electronic trading platform. Investors can generally receive a response within 120 seconds of the submission of a quote request although less liquid funds may require more time than highly liquid products according to the exchange.

The process is designed to achieve a high degree of automation with straight-through processing, clearing and settlement, which reduces operational and counterparty risks, while ensuring compliance with best execution requirements for large orders.

Deutsche Börse said in a statement: “Investors therefore benefit from a potential price improvement over execution against a single market maker quote, and ensure best execution by simultaneously interacting with the full liquidity available in the order book.”

Jürgen Blumberg, head of European capital markets at Source, told Markets Media that the European ETF issuer very much liked the Deutsche Börse initiative. “In Europe approximately 70% of ETF volume is traded over-the-counter and liquidity is invisible. If there is more visibility then ETFs will be even more widely used,” he added.

Lansing agreed that the European market will benefit from more on-exchange trading.

“A number of ETP issuers (including us) have long recommended the creation of a consolidated tape (a comprehensive record of both on-exchange and OTC trades),” Lansing added. “Given that that is still in process, more trading on-exchange will go a long way to promoting greater liquidity, price discovery and transparency.”

MiFID II is due to introduce mandatory reporting for ETFs but the new regulations covering European financial markets have been delayed by one year to 2018.

For the full article from MarketsMedia, please click here

Rule 48, ETF Dislocation: BATS CEO Says “No Humans Needed”

When ETFs were first launched in 1993, the ‘framers’ might not have fully appreciated what would happen to the respective ETF cash index in the event of a lopsided market opening when the underlying constituents had not yet opened for trading, despite the easy recall of October 1987..

Since that time, market structure experts and the cast of exchange characters regulated by the SEC have introduced a litany of steps, including NYSE’s Rule 48 that are designed to serve as circuit breakers to bring calm to the chaos caused by out-sized volatility, particularly during market openings. According to observations in the wake of the most recent market turmoil, when ETF market-makers stepped back and provided wide-as-a-truck pricing because constituent issues had yet to open, the CEO of BATS Global Markets, the electronic trading platform that has grown from the size of mouse to being one of the bid kids on the block, sent a signal to the media that led many, including MarketsMuse editors, to infer that he believes that humans are no longer relevant in the new age of Wall Street, computer horsepower and smart algorithms.

As noted by the WSJ in its Sep 1 story by Bradley Hope , “…in a strongly worded rebuke to its rival and NYSE operator Intercontinental Exchange on Tuesday, BATS Chief Executive Chris Concannon said that NYSE Group’s process for opening trading on stocks listed at the exchange was “broken” and that major changes needed to be made to protect investors from future problems. “No one on the planet operates that way, and no one should operate that way,” he said in an interview, adding that he sees “very limited value” in the use of humans on the trading floor

Some traditional market experts have since quietly suggested that Concannon “could have bets in his belfry if he believes that computers should be taken out of the equation.”

NYSE officials and floor brokers have argued for years that they serve a crucial role providing slower trading within today’s high-speed, electronic markets.

“The debate is about whether we need a slower market structure or a faster market structure on days with large systemic volatility,” said David Weisberger, managing director at market-analytics firm RegOne Solutions. The slower version is driven largely by people, whereas the faster one is controlled by computers and trading algorithms, he added.

The NYSE spokeswoman defended the exchange’s approach by contrasting it with a notable failure that BATS experienced itself with its own initial public offering.

Here’s the two points of Rule 48 and what the debate is based on.

  • IN A NORMAL MARKET: Market makers indicate where a stock might open. That helps investors modify buy and sell orders.
  • IN A VOLATILE MARKET: Market makers don’t have to indicate where a stock might open. That should make it easier for stocks to open quickly. But investors have less information about the market prices for securities.

Ted Weisberg, a longtime floor trader and founder of floor brokerage Seaport Securities Corp., said invoking Rule 48 can speed up the opening of stocks but leads to less transparency.

“When you invoke Rule 48, you’ve opted for speed over price discovery and speed over transparency,” he said. “‘What’s in the public’s best interest is transparency and time to react.”

An NYSE spokeswoman said: “Rule 48 allows us to expedite the opening of stocks on volatile days while maintaining the hallmark transparency that we are known for.”

BATS is accustomed to Donald Trump-style brashness  In prior MarketsMuse coverage ,they are strong advocates of “pay-to-play” kickbacks that provide rebates in exchange for orders sent to their electronic venue as opposed to sending to competing electronic trading venues. Here’s an excerpt from that story: Continue reading

WisdomTree Case Study: ETF Best Execution

MarketsMuse editor note: The following post, extracted from Jan 6 submission to ETFtrends.com is best described as an advertorial courtesy of WisdomTree Investments, one of the ETF industry’s leading Issuers. While readers of MarketsMuse might be inclined to muse “[This ‘case study’ is] Elementary, my dear Watson, totally elementary!,” MarketsMuse editors would retort: “You would be astounded by the number of ‘sophisticated’ investment managers who somehow still don’t understand how block trades in ETFs are best executed, and precisely who these managers should be seeking objective guidance from before hitting a “send” button.

Equally important: the below submission makes frequent reference to ETF “market-makers”, a phrase that traditionally infers “proprietary trader who is taking the other side of a customer’s trade in order to extract a trading profit.” In today’s market structure, those who ‘make’ markets also include agency-only brokers, who, unlike traditional “market-makers”, agency brokers perform a similar role within the context of providing best available 2-sided quotes; they act as fiduciaries and specialize in sourcing liquidity from among an assortment of “market-makers. Instead of trading against customers, these brokers act in the interest of customers and simply charge a pre-disclosed commission for sourcing liquidity and executing  the right price. As such, these agency-only experts act in the interests of the customer and [arguably] are the best route for fiduciaries who seek best price based on an aggregation of all available bids and offers that are typically not displayed on ubiquitous, screen-based markets.

Here is the extract of WisdomTree’s submission:

wisdom treeThis blog post is relevant to institutional investors interested in trading exchange-traded funds (ETFs) in significant volume. Individual investors do not always have access to liquidity providers to trade ETFs as referenced below.

What if I told you that a large $500 million order and a smaller $1.2 million order traded in the same ETF, but one executed around the bid/ask spread and the other drove up the ETF price 84 cents, or almost 5%. Could you guess which trade was responsible for each outcome? The answer may surprise you. The $500 million notional block traded in-line, and a small order of $1.2 million notional block pushed the WisdomTree Brazilian Real Fund (BZF) price 5% away from its underlying value. The trades were done on different days and times, but the price of the ETF and its trading characteristics were similar. So what was the difference between the two trades?

On October 9, 2013, a 27-million-share block order worth approximately $500 million executed inside the bid/ask spread of BZF. You can see the trade in the highlighted area in figure 1.

Wisdom Image 1

The client who initiated that trade was able to work with an ETF liquidity provider who had the ability to access the underlying basket in the primary market on behalf of the client. It is important to remember that an ETF is at least as liquid as its underlying securities, regardless of the average daily volume. That demonstrates the beauty of the open-ended ETF structure and its ability to create new shares and redeem shares daily. This trade was successful from an execution standpoint because the client worked together with their trading partners on a best execution strategy.

On the other side of the execution spectrum, another investor entered a 70,000-share ($1.2 million notional value) market order in BZF on November 13, 2014, just before 3:39 p.m. ET. This resulted in a quick spike up in the price of the ETF, as you can see in figure 2.

Wisdom Image 2

In this second example, the order book, or depth of the bids and offers of the ETF trading on the exchange, handled a market order of this size in an inefficient manner. The depth of bids and offers in an ETF order book is not always reflective of the liquidity of the underlying asset. While there is a lot of liquidity in Brazilian Real forwards, there are not a lot of resting orders in the BZF order book. By definition, a “market order” is designed to buy or sell an investment immediately at the best available price on the secondary market and will not stop until completed. For this reason, the order for 70,000 shares swept up all available shares for sale until it was completed, which resulted in the price increasing by almost 5%. This was followed by the price of the ETF correcting back in line with the “indicative value” of the underlying basket. Figure 3, and the yellow arrow, illustrate how quickly the order was filled and how far the price moved to satisfy the 70,000- share buy order in the order book.

You may be wondering, “Isn’t there a market maker who is supposed to be providing liquidity so this doesn’t happen?” The answer is yes. [MarketsMuse editor note: But unlike the days of yore, when stock exchange floor specialists were required to ‘take the other side’ of investor orders within the context of prevailing volume, the ‘new market structure’ does not mean that a market maker must provide any more than that he or she would be willing to buy or sell on either side of the prevailing quote. And, because the “beauty” of today’s electronic markets is that bid-offer spreads can move more quickly than you can blink your eye, a market order typically moves so fast that it may not provide enough time for the market maker to “reload” their bid or offer on the screen before the order has driven up the price significantly.]

In summary, these two examples are something that all ETF investors can learn from. On the Capital Markets Team at WisdomTree, we try to be proactive in consulting with our clients on best- execution strategies. For larger orders, always look to work with a liquidity provider who can access the underlying basket on the clients’ behalf and provide execution close to the “fair value” of the ETF. Lastly, we encourage all investors to be sure to have a full grasp of the depth of the order book before implementing any market order. We hope this information helps investors in future ETF.

For the full article at ETFtrends.com, please click here

2015 Buy Side Trader Resolutions:Be More Targeted When Using Sell-Side Executioners; These Experts Would Know

MarketsMuse update courtesy of extracts from 31 December story in industry mag Markets Media.com

marketsmedia logoThe buy side is becoming more targeted with sell-side firms, employing a rifle rather than a shotgun approach as liquidity continues to shrink. A big factor behind this newfound independence has been the lessening of liquidity in 2014 in derivatives and fixed income markets, which has forced buy-side institutions to be more resourceful in sourcing liquidity

“The buy-side is more empowered and understandably, taking greater ownership of their execution and process,” Jennica Ross, managing director at execution firm WallachBeth Capital, told Markets Media. “Within those segments they are obviously narrowing the relationships that they have. They don’t need to have the plethora and the sheer numbers of external sell-side relationships that they had before, and the relationships they do have are now much more consultative.”

“The most surprising thing was how many market making firms basically closed up,” said Dave Beth, president and chief operating officer at WallachBeth. “The lessening of liquidity throughout the whole derivative landscape, both listed and the OTC, we see happening at a broad stroke. Clients should expect [spreads] in derivative markets to widen a little bit. I think it has a lot to do with regulation and with balance sheet usage in the bigger institutions.”

In WallachBeth’s ETF market making business, liquidity remains at high levels. “As far as the ETF cash business, one could say the liquidity is as great as ever and it continues to grow,” Beth said. “Whereas in the listed and OTC options space, there’s been an express decrease in immediately actionable liquidity. I think that it’s affected us no different than any other player. I think clients also recognize that the playing field is changing, and that it’s okay to pay a little bit of a wider spread to get their business done.”

WallachBeth continues to diversify its business in order to take up the slack left by the exit of larger sell-side institutions.

“While there’s been contraction of liquidity within the derivatives space, we’ve seen an increased opportunity from more clients who are getting involved in our other business units, whether that be equity, program trading or fixed income trading,” said Ross.

For the full story from Markets Media, please click here.


Best ETF Market-Making Award Goes To..

In coetfcomlogonnection with the 1st Annual ETF Awards hosted by ETF.com, the world’s leading authority on exchange-traded funds, agency execution firm WallachBeth Capital was selected “ETF Market- Maker of the Year” by a panel of judges representing prominent firms from across the ETF industry. The announcement was made during a gala dinner held on March 20th at New York’s Chelsea Piers and attended by more than 300 industry members.

According to ETF.com Founder and CEO Jim Wiandt, “The award to WallachBeth for market maker of the year recognizes the firm that has done the most to improve investor outcomes throughout education, support, services, innovation and outreach.” Runners-up for the category included Citigroup, Goldman Sachs, Jane Street Capital and KCG. A total of 23 categories were voted upon by the ETF.com judge’s panel.

In making the award, the ETF.com judges noted, “While many firms share credit for helping ETF investors understand ETF liquidity, few have been more dedicated to the task of educating clients and improving outcomes than WallachBeth. The prototypical agency broker, it uses strong Street connections to source liquidity for clients, allowing the world’s best market makers to compete for each order. The agency approach—where WallachBeth is always on the side of the client—resonates with advisors, who often need hand-holding when they enter the fast-moving world of ETF trading.”

ETFs Test Market-Making Skills

marketsmedia logoCourtesy of Steve Marlin/MarketsMedia

With exchange-traded funds playing an increasingly important role in portfolio management, the ability to accurately price the instruments has placed a premium on market-making skills.

“ETFs are a unique breed of financial instruments,” said Chris Hempstead, director of ETF execution services at WallachBeth. “Order execution requires the ability to navigate these markets and compel liquidity providers to offer customers the most aggressive bids and offers.”

With upwards of 1,500 listed products in the U.S. alone, the secondary market for ETFs remains evolutionary, and liquidity in many ETFs is often elusive, despite the sophistication of screen-based electronic markets.

Chris Hempstead, WallachBeth Capital
Chris Hempstead, WallachBeth Capital

“ETF wrappers provide an efficient way to gain access to an index,” Hempstead said. “But not all ETFs have sufficient depth of quotes, so you need to partner with someone who knows how to value an ETF. Even SPY, the most liquid ETF, doesn’t trade exactly at NAV [net asset value]. For less liquid ETFs, the spreads could be considerably higher.”

Sourcing liquidity at the right price for ETFs, ETNs and CEFs requires an advocate with a wide net, unhindered visibility and unencumbered market access, one whose pool of liquidity extends beyond traditional screen-based markets and the boundaries that conventional brokers are constricted to. “Because we’re product experts we are able to use both traditional and tech-savvy means to quickly and efficiently canvass a broad and diverse universe of reliable liquidity providers,” Hempstead said. Continue reading

Virtu Financial Buys Dutch Market-Maker in Push to Provide European ETF Liquidity

Courtesy of WSJ with reporting by Jenny Strasburg

Virtu Financial LLC said it bought a Dutch market-making business, bolstering the U.S. trading firm’s presence in a European exchange-traded-funds market that has emerged as a profitable battleground for high-speed traders.

Virtu, one of the most-active traders of stocks, commodities and other securities in the U.S. and Europe, acquired the market-making division from Amsterdam-based Nyenburgh Holding BV, the companies said. They declined to disclose the value of the transaction.

Market makers stand ready to buy and sell securities at quoted prices, helping ensure that trades are executed smoothly. Market makers take a sliver of profit from each transaction, and the flow of data can help them profit in their own trades.

With the Nyenburgh deal, New York-based Virtu gains relationships with ETF issuers as well as buyers and sellers of the instruments, which include pensions and hedge funds, said Chris Concannon, a Virtu partner and chief compliance officer of its broker-dealer operation. Virtu has traded European ETFs since 2009.

Virtu expects growth in the ETF market will help fuel trading in the assets that underlie them, from gold and palladium to agricultural-commodity futures. The firm, through its Dublin-based office, became a registered market maker on the London Stock Exchange in August, and is registering on major European exchanges, said Douglas Cifu, Virtu’s president and chief operating officer.

The deal comes amid mounting competition and regulation in the European market for ETFs, or investment funds that track the performance of indexes and other baskets of individual securities. Unlike in the U.S., the majority of ETF trading in Europe occurs in over-the-counter transactions. But new rules are pushing more ETF trading onto exchanges, providing opportunities for  trading firms like Virtu to grab a bigger share of the market.

Noted James Ryan of London-based ETF broker WallachBeth International, “Virtu’s expanded role as a liquidity provider in European-based ETFs will necessarily enhance the playing field as the ETF market in Europe continues to evolve and otherwise catch up to the US market in terms of both institutional investor transparency and overall liquidity.” Continue reading