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ETF News

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

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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)

ETF News, People Profiles

How NOT to Execute Your ETF Block Order..Best Ex Memo

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Editor note: For those who didn’t get the”Best Ex Meets Worst Ex” memo,  Ugo Egbunike from IndexUniverse spotlighted a block trade in QAI this past Monday that was apparently mangled by the executing broker, illustrating once again that ETFs are NOT stocks, and real best execution requires guidance from a truly-professional trader that actually knows how to execute ETF orders.

Someone got taken to the cleaners on Monday, buying 16,000 shares of  QAI—a trade that highlight the nuances of market-on-close (MOC) orders. They could have avoided it. Here’s what happened, why and how you can avoid it.

At 4:00:00 p.m. ET, around 16,000 shares of the IQ Hedge Multi-Strategy Tracker ETF (NYSEArca: QAI) were executed at $28.83—that’s $1.28, or 4.64 percent, more than its last traded price of $27.55 at 3:59:59 p.m. Eastern time. It was completely unwarranted.

At 3:59:59 p.m. ET, someone was offering 12,800 shares at $27.56. The fund’s underlying value didn’t change in that one second. At the end of the day, its net asset value was $27.50.

 

Time Exchange Bid Size Bid Ask Ask Size Trade
3:59:15
NYSE Arca
100
27.51
27.55
3,900
3:59:59
NYSE Arca
200
27.51
27.55
1,600
3:59:59
EDGA
$27.55
 3,800
3:59:59
NYSE Arca
200
$27.51
$27.56
3,800
3:59:59
NYSE Arca
200
$27.51
$27.56
12,800
4:00:00
NYSE Arca
$28.88 *
 16,077
4:00:00
Nasdaq
200
$27.51
$27.60
18,000

* NYSE Arca Market Closing Price                                                                        Source: Bloomberg

The trade was the result of a poorly executed market-on-close (MOC) order. MOC orders for NYSE Arca-listed ETFs are automatically entered into the NYSE closing auction, which is outside of the core trading session.

Unfortunately, orders in the NYSE closing auction are exempt from Rule 611: the Order Protection rule.  The basic idea behind the rule is to protect investors from faulty trades by comparing all nationally placed quotes.

If a better price exists for a market order, it gets routed to that exchange before it can get traded at its current exchange. In the case of the MOC trade in QAI, there was no protection—the trade was exempt because it occurred during the auction and not during the regular trading session.

It seems likely that the buy order was entered as a market order into the MOC NYSE closing auction. Had it been a limit order, the buyer’s limit would not have been $28.83, which means the final execution price would have been great news. Given that the last price was $27.55, a market order must have been behind that terrible trading strategy. Continue reading →

ETF News

JPMorgan Caps Issuance on MLP ETN

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The ETF Professor, Benzinga Staff Writer

JPMorgan Chase (NYSE: JPM) announced on Thursday that will cap issuance for the popular Alerian MLP Index ETN (NYSE: AMJ) at 129 million notes. The move is significant because with almost $4.2 billion in assets under management, the Alerian MLP Index ETN is the largest exchange-traded product offering exposure to MLPs.

The universe of MLP exchange-traded products has grown rapidly, but the Alerian MLP Index ETN and the ALPS Alerian MLP ETF (NYSE: AMLP) combine for the bulk of the roughly $7.5 billion in MLP exchange-traded products assets under management, according to data furnished by WallachBeth Capital.

New York-based WallachBeth, one of the largest ETF execution firms in the U.S., said JPMorgan’s decision to cap issuance on AMJ could open the door for new MLP ETFs to gain assets. In a note published by the firm today, AMLP, the newly minted Yorkville High Income MLP ETF (NYSE: YMLP) and the Global X MLP ETF (NYSE: MLPA), another new fund, were cited as examples of fund that could potentially benefit from the AMJ issuance cap.

“When an ETP no longer allows for creations, the fund starts to trade like a closed end fund,” WallachBeth said in the note. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.”

Continue reading →
ETF News, Strike Price

As Market Sagged in Q1, Many Hedge Funds Held ETF Put Options

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It is no secret hedge funds have been using exchange-traded funds (ETFs) to make directional bets on a broad market index or a specific industry group. They frequently buy “call” options or hedge with “put” options. Sometimes they hedge by shorting the funds outright.

This said, one of the interesting unnoticed themes to emerge from the recent wave of quarterly 13F filings, which take a snapshot of the portfolios of equity investors on the final day of the first quarter, are the number of high-profile hedge fund managers who took new put option bets to hedge their exposure.

In many cases, these are hedge funds that don’t typically have a history of investing in ETFs. This hedging strategy so far has proved to be a prudent move, given that the stock market has sagged since its strong, double-digit first-quarter surge.

According to David Beth of institutional options and ETF execution firm WallachBeth Capital, “While we continue to see increasing ETF exposure on the part of our hedge fund clients, many of whom necessarily layer option strategies to hedge directional bias, we’re also seeing noticeable upticks insofar as traditional long/short managers initiating the use of  ETF options as part of a fundamental risk management approach.

Added Beth, “While the more sophisticated focus on strategies that can profit from changes in volatility and skew over both short and longer-term horizons,  even the most elementary strategies that use puts and/or calls are certainly gaining favor with long-established and well-respected hedge funds as well as other institutional client profiles.” Continue reading →

Strike Price

What’s Next?..Options Trading On Facebook (FB)

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Options on Facebook (NASDAQ: FB) will be available as early as May 29th. With volatile price action in FB after its IPO, traders will look to options strategies to profit

In the next several months FB is going to face pressure to grow into its current 100 Billion dollar valuation. As a growth stock trading over 100 times earnings, any sign of slower growth in Facebook will cause the stock to plummet quickly.Traders who do not think Facebook can hold its current valuation have a number of options strategies to profit from any fast downside price action.

Depending on implied volatilities of FB options, traders can be either short or long volatility. It is unlikely that FB stock will increase or decrease in value by more than 30% in one year. If options are trading will implied volatilities greater than 30%, traders should be net sellers of options. Selling vertical call spreads, which involves selling call options at strike prices above the current price and buying a call option at strike prices even farther out from the current price. This strategy will be profitable if FB maintains its price or decreases.

Notes WallachBeth Capital’s Randy Sharringhausen, an institutional options market expert, “Even if the company’s fundamentals don’t come close to justifying its IPO price, this is a company that has 450 million customers that visit every day and a corporate treasury flush with enough currency to finance any number of  major acquisition to better monetize its customers.  This should prove to be an interesting name to trade by the hedge fund and risk arb community, as well as the long/short managers.”

Continue reading →

ETF News

Are Junk Bond ETFs Sending Signals? (HYG, JNK, SJNK)

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By The ETF Professor
Benzinga Staff Writer

The proliferation of new junk bond ETFs in 2012 has been nothing short of impressive and two industry stalwarts, BlackRock’s (NYSE: BLK) iShares and Van Eck Global’s Market Vectors unit, have been leading the charge.

But it is some of the more seasoned high-yield bonds that are catching traders’ eyes on Thursday. Following an usual $725 million redemption last week in the $11.1 billion SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK), activity is picking up across the board in highly liquid, large asset junk bond ETFs.

While the redemption in JNK last week wasn’t a true redemption because the seller allegedly took delivery of the actual bonds, unusual activity is permeating the high-yield bond ETF space today. JNK has already double its average daily volume.

“The selling we have seen today is not for receipt of bonds. This looks to be an exit trade from this asset class,” ETF market maker WallachBeth Capital said in a note.

“Considering that Germany may throw in the towel on austerity, the U.S. could enter round 3 of quantitative easing, the banks are under increased regulatory pressure and still the lingering Greek issues, it isn’t surprising that some might see higher rates on the horizon,” Chris Hempstead, head of ETF execution services at WallachBeth, said in an interview with Benzinga. “That would not bode well for these funds.” Continue reading →

ETF News, Strike Price

Institutional Investors Increase Use of ETFs, says Greenwich Associates

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At first used by Institutional Investors for manager transitions, rebalancing and other tactics, fund managers strategic use of ETFs are on the rise, in particular to gain long-term exposure to desired asset classes, according to a freshly-published study by Greenwich Associates.

In the hot-off-the press study, “57% of institutional ETF users employ these products to achieve strategic allocation ranges, while 20% of institutional funds use ETFs for tactical purposes to achieve alpha, as do 38% of asset managers using these products.”

The study also concluded that “once institutions integrate ETFs into their manager transition or cash equitization processes, they relatively quickly begin seeing additional applications for the products.”  Of equal note, holding periods of ETFs by institutional fund and other asset managers is on the rise, according to the study.

Noted Chris Hempstead, head of ETF Execution for WallachBeth Capital, “The Greenwich study does a good job of confirming what we’re seeing and hearing from clients; more tactical applications, and those that have longer-hold horizons are adding an options overlay element to their strategies so as to cushion volatility and enhance overall alpha.”

For the full report, greenwich associates – strategic uses for etfs

 

ETF News, People Profiles

Better Take a Peak at China’s PEK..Premium Merchandise

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Courtesy of the ETF Professor at Benzinga.com

Following the March 22 debacle concerning the VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX  that saw the now infamous ETN tumble 30% in that one trading day, traders and investors predictably wondered what exchange-traded product could be next to fall victim to a similar scenario.

That scenario being an ETF or ETN trading at an elevated premium to its net asset or indicative value. One fund that has been noticed trading at elevated premium’s to its NAV is the Market Vectors China ETF (NYSE: PEK [6]) and this has been the case since the ETF debuted in October 2010.

What some investors may not understand is the reason why the Market Vectors China ETF has previously traded at premiums to its NAV that have been as high as 12%, sometimes a tad more. PEK is the only U.S.-listed ETF that offers investors exposure to China’s A shares market, but since foreign investors are limited in owning Chinese A shares directly, PEK uses swaps and derivatives instruments to accomplish its objectives.

Noteworthy is the fact that PEK’s premium has started to shrink, coinciding with news announced earlier this month that the China Securities Regulatory Commission boosted the quotas for qualified foreign institutional investors to $80 billion from $30 billion.

Chris Hempstead, head of ETF trading for New York-based execution firm WallachBeth Capital, talked about the implications increased access to China’s A shares for foreign investors may have on PEK in an exclusive interview with Benzinga on Friday.

Chris Hempstead, WallachBeth Capital

“PEK trading an elevated premium to its NAV in the past was not a function of it not being able to create and redeem shares as was the case with TVIX,” Hempstead said. “There are completely separate reasons why PEK’s NAV has been elevated compared to TVIX and some of the other products.”

Hempstead explained that it is the process by which PEK accesses China’s A shares market that has led to the high premium to its NAV in the past. Continue reading →

ETF News, People Profiles

European Platform to offer best price for ETFs

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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 →

ETF News

Exotic ETFs Going Mainstream

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Leveraged and inverse exchange-traded funds received a lot of scrutiny during the volatility of last year. But now that volatility is down and equities are on the rise, investors are more and more viewing these once exotic products as just another way to take positions on the direction of the markets.

That was the opinion of ETF insiders speaking on the panel “Volatility and Leveraged ETFs” at the Security Traders Association of New York conference on Thursday. ETFs that are leveraged two, three times, or even more, or that move in an inverse relationship to indexes like the S&P 500, are slowly becoming more accepted.

Stephen Sachs, head of capital markets for ProShares, said that while ETFs drew a lot of attention during high-volatility periods last year, the actual evidence suggests those instruments did not cause the volatility. Leveraged and inverse products were only a small part of trading during those periods, and important macro events were also very much in play, he said.

“At the end of the day, volatility is not an asset,” Sachs said. He added that unlike actual asset classes, investors don’t take buy and hold positions on the VIX. Investors in VIX ETFs need to understand that the product exists for taking positions on risk, not for long-term investments.

Chris Hempstead, director of ETF execution at WallachBeth Capital, said inverse and leveraged products have gotten more than their fair share of press. However, they too serve a specific purpose, and the investment community needs to learn more about them.  “If you trade anything, you should be paying attention to the ETF market,” Hempstead said. “It [the market] is a lot harder [to understand] than it was five years ago.” Continue reading →

ETF News

ETFs & Obamacare: The Broccoli ETF

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“If Congress can force me to buy health insurance, can it also force me to eat broccoli?”…

That question, according to WallachBeth Capital’s Chris Hempstead, is one that he can’t answer, but Hempstead does have a sharp-as-a-scalpel perspective re: the ETFs to put under a microscope as the US Supreme Court is scheduled to perform surgery on President Obama’s healthcare initiative:

IHF: IShares DJ US Healthcare Providers (77% Healthcare Services and 17% Pharma)

Year to date the IHF fund is +11.6% and since Obamacare passed +24% versus SPX of 12.6% and 20% respectively.

PTH: PowerShares Dynamic Healthcare Sector (25% Pharma, 25% Healthcare Products, 24% Healthcare Services and 14% Biotech)

YTD the PTH fund is +12.6% (SPX 12.6%) and since Obamacare +28% (SPX 20%).

FXH: First Trust Health Care AlphaDEX (30% Pharma, 30% Healthcare Services, 24% Healthcare Products and 12% Biotech)

YTD the FXH fund is +13% (SPX 12.6%) and since Obamacare +29% (SPX 20%).

YTD  XLV is +7.9% (SPX 12.6%) and since Obamacare +16% (SPX 20%).  XLV has an expense ratio of .18%.

 

ETF News, People Profiles

BlackRock Bulks Up in Europe: Expanding “ETP Education” Campaign

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However much the use of ETF and ETP products in Euro-Land continues to grow,  Global ETF Issuer iShares knows that it can grow faster and bigger.

Consistent with parent company BlackRock Inc.’s focus on staying in front of the pack, and as reported by IndexUniverseEU staff, iShares has recently introduced a “due diligence tool” aimed at helping professional investors obtain granular information about its European exchange-traded products.

According to iShares’ head of EMEA sales, David Gardner, “Our new “Know Your ETP” tool offers a robust framework, and clear standardised processes by which institutional investors can arrive an informed decision more effectively.”

On an objective note, ETF industry veteran Mike McCoy, a senior member of ETF liquidity aggregator WallachBeth Capital, who recently landed on the docks of London to help launch his firm’s new Euro ETF execution desk (in joint-venture with UK-based brokerage NSBO), said, “BlackRock certainly knows that the ‘educating your customer rule’ is integral to the evolution of ETF embracement. As quickly as the market is growing, its critical to maintain the education momentum with the spectrum of investors, however sophisticated they might be.”

For the complete story, click on the IU logo

ETF News, People Profiles, Tech Talk

Bloomberg LP Touches ETF Hot Button: Where’s the Beef ?

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Bloomberg LP's Catherine Cowdery Feb 29 Interview w WallachBeth Capital's Andy McOrmond

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. Continue reading →

ETF News, People Profiles, Tech Talk

ETF Transparency: Thinly-Traded Does Not Mean Illiquid-Says Leading ETF Issuer

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Unbeknownst to too many who traffic in ETFs, the phrases “thinly-traded” and “illiquid” are far from synonymous.

Yes, of the now 1300+ exchange-traded funds, 2/3 of the total ETF trading volume is attributed to the top 25 “go-go names.” But, whether you’re an RIA, a corporate treasurer, a hedge fund manager, or a pension fund administrator, if your investment and/or trading decisions are predicated on what the “screen” displays, you’re not only foregoing investment opportunities that your peers are benefiting from, but you’re likely in the wrong business.

That’s the take-away from a solid white paper produced by a group that would know: Emerging Global Advisors LLC, one of the leading issuers of emerging market ETF products.

It takes more than moxy for a firm that feeds products into the exchange-traded marketplace to observe that trading screens (which aggregate bids and offers scrapped from the assortment of regulated exchanges) are often less than transparent.

To drive this point home, the white paper’s leading shout out: “The Screen Market is Not the Market.”

Continue reading →

ETF News, People Profiles, Strike Price

VIX Higher, SPX Higher; 30 Yr T touching 3 (percent)..Meaning??

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Everything went higher today (despite the data during the last minutes into the close); stocks, bonds and fear; a somewhat unique combination of ups. When noticing today’s relatively rare direct correlation between equity market volatility (aka VIX), equity indices and “safe haven” US government bonds, option market veteran David Robbins of WallachBeth Capital says,  “The wall of worry is simply growing taller.” 

With the benchmark  barometers DJIA and SPX continuing to climb past technical and psychological barriers, and now only single digit percentage points away from all time market highs despite the still-fragile (albeit somewhat improving state of the US economy), “its always worth worrying” said Robbins, perhaps explaining the subliminal spikes noticed in outer-month VIX options, and in particular, put options.

Added Robbins, “The skew is always a good clue, and if you look at April and June VIX or VXX options, its clear that market pros are re-framing;  the risk of a market pull back increases each week the equities market goes up.  There’s always a black swan out there flapping its wings,  but its simply more expensive today to hedge that risk than it was last week.

ETF News, Global Macro Strategy, People Profiles

Amsterdam Hosting 3rd Annual InsideETFs Europe

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Where’s a better place than Amsterdam for an International ETF conference in the month of May? Our global concierge says,  “No place compares to Amsterdam, for a variety of reasons!”

Which is exactly why IndexUniverse, the largest ETF conference producer, is once again hosting its “Annual InsideETFsEurope” for the third year in one of the most entertaining cities in all of Europe.

US-based ETF market players who have attended InsideETFsEurope in prior years will confirm this program is a  “great do” for those that want to refresh relationships and make new acquaintances with the growing number of European fund managers that are building out their ETF portfolios.

Observed upcoming attendee David Beth, President of NYC-based WallachBeth Capital, one of the “go-to” firms for those seeking ETF best execution in US ETF products, “Having recently formed an alliance with London’s NSBO to replicate our best execution model for Europe, this conference will provide a great opportunity for portfolio managers and head traders to better understand what we do, and how we do it with respect to capturing better price executions than they might ordinarily be accustomed to.”

Cheers to all..click on the conference logo to register and don’t forget to make your dinner reservations well in advance!

ETF News

UK Wrap Platforms Wrapping Arms Around ETFs

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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.”