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When European ETF Execution Becomes a Stand-Out Factor, PM’s Step Out Orders

logo_financial-news  courtesy of DowJones’ Peter Davy

Dec 10 2012

Exchange-traded funds may be seen as a low-cost investment option but the huge choice of how to trade these products can have expensive consequences for institutional investors.

“It can have a very significant impact. Get a bad execution and you start with a drag on the performance,” said Deborah Fuhr, partner at ETFGI, the research and consulting firm.

In Europe, unlike the US, only a minority of ETF trading is done on stock exchanges. About 70% of ETF trading takes place over the counter, off-exchange, according to ETFGI. That may mean going to an “authorised participant” that is registered to allow it to create or redeem shares of the ETF with the product provider, or simply buying or selling the ETFs without going through the exchange.

For smaller trades and big ETFs tracking a major index, such as the FTSE 100, that may not be necessary. There an investor may trade up to £3m on exchange with few problems. For the bigger trades undertaken by institutional investors and for more esoteric ETFs such as those based on emerging markets or commodity indices, trading on exchange is likely to affect the price (since ETFs on exchange can trade at a discount or premium to the value of the underlying assets they track), requiring them to look elsewhere to avoid doing so, or just to get a better price than available on the exchange.

Thorsten Winkler, co-founder at Frankfurt-based Advanced Asset Management, which manages ETF funds of funds, said it is natural to turn to the investment banks linked to ETFs when looking to trade those products. He said: “You would think they should be able to provide the best execution of their own product.”

In other circumstances, such as trading an iShares ETF, for example, since BlackRock doesn’t have a broking arm, many investors instead turn to specialist marketmakers, committed to providing continual prices to buy and sell ETFs, such as Flow Traders, Susquehanna and Knight Capital.

At Evercore Pan Asset, another fund manager constructing portfolios of ETFs, co-founder Christopher Aldous is keen on WallachBeth, the US institutional broker that entered the European market earlier this year in a joint venture with North Square Blue Oak. It does no principal trading – in which the broker takes ownership of the ETF – but works purely on commission to try to find the best price for clients from marketmakers and other liquidity providers. Aldous said: “For us it is like outsourcing our ETFs sales trading service.”

Laurie Pinto, North Square Blue Oak chief executive, argues that using agency brokers is the only way investors can be sure they are getting the best price. He said: “How can you trade with a marketmaker knowing he is making money out of trading with you – not taking a commission and getting the best price but making money out of the trade? They make their entire living trading against you.”

However, the marketmakers counter that agency brokers have to deal with them. Matthew Holden, managing director and head of ETF trading for Europe at Knight Capital, said: “Agency order aggregators cannot exist without marketmakers.”

For the full article courtesy of FinancialNews, please click here (subscription required)

European Platform to offer best price for ETFs


An exchange-traded fund platform service has been launched into the UK and European market to help IFAs and wealth managers ensure best execution when recommending clients invest in ETFs.

Laurie Pinto, chief executive of London-based securities research firm NSBO, said the service is being offered through a joint venture between NSBO and WallachBeth, a US inter-market broker.

Mr Pinto said the service, already popular in America, was important for the post-retail distribution review world as it aims to get the best price for ETFs.

He said: “In America each tranche of an ETF has to be put on an exchange, so you can track the price more easily. This does not happen in Europe.

“This puts the end investor at a major disadvantage. This service will aim to educate investors on getting the right price. The service of best execution is a big part of managing money.” Continue reading

UK Wrap Platforms Wrapping Arms Around ETFs

As reported by FT.com, retail investors in the UK are rapidly wrapping their arms around ETF products, and platform providers are ramping up their offerings to facilitate the burgeoning growth in what is already a ubiquitous product in the US.

  According to the FT.com story, David Bower, head of iShares UK, said the ETF industry  would be a major beneficiary of RDR which will ban commission payments to financial advisers from the beginning of 2013. ETFs, unlike many other investment funds, do not pay commissions to advisers.

Mr Bower said the strong growth that iShares saw on wrap platforms in 2011 suggested that ETF usage amongst financial advisers and discretionary fund managers would continue to rise.

BlackRock saw assets held in iShares ETFs across six wrap platforms used by IFAs increase 34 per cent in 2011 to £746m at the end of December.

The six platforms are run by Ascentric, Novia, Nucleus, Raymond James, Standard Life and Transact.

Novia saw assets held in iShares ETFs increase 96 per cent last year while Ascentric reported an 88 per cent rise.

Paul Boston, sales and marketing director at Novia, said that ETFs were playing an increasingly important role in both advisory and discretionary portfolios on the Novia platform.

“This is proving to be a well-trodden investment strategy that significantly reduces the overall cost of a client’s portfolio,” Mr Boston said.

Further affirming this trend, UK-based institutional broker North Square Blue Oak (NSBO) has recently aligned with US-based ETF market expert WallachBeth Capital to form WallachBeth International, whose role, according to NSBO principal Laurie Pinto, “will include servicing institutional portfolio managers as well as leading wrap account administrators in the course of their securing best execution in a market place that is still catching up to the level of transparency that is available for US-centric ETF products.”

Added Pinto, whose firm is headquartered in London with an affiliate office in Beijing, “We certainly expect the demand for ETF products in the European market will emulate the growth trajectory which the US market has experienced over the past several years. To the extent that we can introduce best practices for true best execution, we believe we’ll be adding significant value to institutions that are utilizing these products.”