Live ETF Trading: Institutional Strategies for Best ETF Execution

Transcription

1 Live ETF Trading: Institutional Strategies for Best ETF Execution Dave Nadig, Session Leader President, ETF Analytics IndexUniverse Matt Hougan, Session Leader Executive Vice President, Global Head of Content IndexUniverse Bill Ahmuty, Presenter Director, ETF Trading Societe Generale Christopher Johnson, Presenter Director, Listed Derivatives Sales Knight Capital Group

2 Session Leaders: Panelists: Dave Nadig President, ETF Analytics IndexUniverse Bill Ahmuty Director, ETF Trading Societe Generale Matt Hougan Executive Vice President, Global Head of Content IndexUniverse Christopher Johnson Director, Listed Derivatives Sales Knight Capital Group

3 Basics of Trading

4 Myth 1: You Can t Trade an ETF with less than 100k shares of ADV

5 Myth 2: An ETF is As Liquid As Its Underlying

6 Elephants & Knotholes Trade Source: Bloomberg,

7 Bulls &China Shops Trade Source: Bloomberg,

8 How An ETF Works ETFs, Inc.? For internal use only

9 ETF Anatomy: Creation/Redemption Authorized Participant $2.5 million 100K Inc. $25 CSCO AAPL CAT MSFT IBM For internal use only

10 ETF Anatomy: Creation/Redemption Authorized Participant $25 100K Inc. $25 CSCO AAPL CAT MSFT IBM For internal use only

11 Why Be An AP? Authorized Participant $25.00 Fair Value $25.00 $25.00 For internal use only

12 Why Be An AP? Authorized Participant $25.10 Fair Value $25.00 $25.00 For internal use only

13 Why Be An AP? Sell! $25.10 Authorized Participant $25.10 Fair Value $25.00 $25.00 For internal use only

14 Why Be An AP? IBM MSFT AAPL CAT CSCO Buy Holdings! Authorized Participant $25.10 Fair Value $25.00 $25.00 For internal use only

15 Why Be An AP? Authorized Participant Selling Pressure Buying Pressure $25.01 Fair Value $25.01 $25.01 For internal use only

16 Why Be An AP? Bought: $25.00 Sold: $25.10 Margin: $.10 Authorized Participant Selling Pressure Buying Pressure $25.01 Fair Value $25.01 $25.01 For internal use only

17 Why Be An AP? Buy! $24.90 Authorized Participant $24.90 Fair Value $25.00 $25.00 For internal use only

18 Why Be An AP? IBM MSFT AAPL CAT CSCO Sell Holdings! Authorized Participant $24.90 Fair Value $25.00 $25.00 For internal use only

19 Why Be An AP? Bought: $24.90 Sold: $25.00 Margin: $.10 Authorized Participant Buying Pressure Selling Pressure Fair Value $24.99 $24.99 For internal use only

20 What s In An ETF Bid/Ask Spread? Ask Price Market Maker P&L Creation Costs Forex Hedging Costs Taxes ETF Spread Underlying NAV Spread Brokerage Fees Underlying Bid/Ask Brokerage Fees Taxes Forex Hedging Costs Redemption Fees Bid Price Market Maker P&L

21 ETF Trading Is Hardest In The Middle Difficulty Size of Order

22 Different Asset Classes, Different Spreads Median Spread % All ETFs: Alternatives Asset Allocation Inverse Leveraged Currency Commodities International Fixed Income U.S. Fixed Income International Equity U.S. Equity 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60%

23 Finding Fair Value

24 The Beauty of inav inav = Indicative (or Intraday) Net Asset Value IOPV = Indication of Portfolio Value IV = Indicative Value (especially for ETNs) Yardstick for the current Bid/Ask

25 SPY vs. inav $ $ $ $ $ $ /01/2013 9:30 04/02/ :00 Last Price inav

26 Market Hours Overlap: GXC $70.50 $70.00 GXC Price $69.50 $69.00 $68.50 $68.00 $67.50 $67.00 GXC inav 1/18/12 8:00 AM 1/30/12 4:27 PM

27 The Crushing Horribleness of inav inav s flaws in: International Funds Bond Funds Commodity Funds and any other asynchronous things Sometimes international markets over lap: But not always:

28 Premiums/Discounts: EGPT Egyptian Stock Exchange closes January 27, 2011 Exchange reopens March 23, Protests begin January 25, Mubarak resigns February 11, 2011.

29 Risk Pricing International & Equity ETFs Bill Ahmuty Director, ETF Trading Societe Generale

30 Our Approach to Risk Pricing

31 Global FUT Risk Pricing Example State of the art statistical tool to better manage implicit and explicit risks (spot, dividend, volatility, etc). Creates dynamic hedging strategies on ETFs by optimizing market liquidity, reducing execution costs and increasing correlation Evaluates trading volume and market impact when seeking to effectively replicate an ETF with other ETFs, its underlying basket constituents, and additional hedgable instruments

32 Unwinding a Risk Trade

33 Global FUT Risk Pricing in Action

34 Live Trading Focus on Bonds & Commodities Christopher Johnson Director, Listed Derivatives Sales Knight Capital Group

35 Bond Basket Example 1 CU of EMLC = 200,000 shares ($5.4m) Basket composed of approximately 224 lines in 18 different currencies Sourcing challenges Security Name Quantity Face (Local) Industry Sector Country Currency Last Price Amount Outstanding % of Outstanding BANSAF 10 1/4 08/08/ ,000 Financial BRAZIL BRL ,000, % CHILE 5 1/2 08/05/ ,689,000 Government CHILE CLP ,345,000, % COLOM 12 10/22/ ,130,000 Government COLOMBIA COP ,580,037,040, % RENTEN 8 1/2 02/22/ ,000 Financial GERMANY MXN ,265,000, % HGB 7 06/24/ ,727,000 Government HUNGARY HUF ,107,040, % INDOGB 11 09/15/ ,954,000 Government INDONESIA IDR ,474,000,000, % HYDRRM 7 7/8 10/28/ ,233,000 Utilities IRELAND RUB ,000,000, % MGS /30/ ,000 Government MALAYSIA MYR ,500,000, % MBONO 10 11/20/ ,000 Government MEXICO MXN ,448,698, % NIGB 7 10/23/ ,898,000 Government NIGERIA NGN ,900,000, % PERUGB /12/ ,000 Government PERU PEN ,830,637, % PHILIP 6 1/4 01/14/ ,473,000 Government PHILIPPINES PHP ,770,000, % POLGB 5 3/4 10/25/ ,000 Government POLAND PLN ,848,426, % ROMGB /26/ ,000 Government ROMANIA RON ,544,300, % RFLB 7 1/2 02/27/ ,427,000 Government RUSSIA RUB ,779,276, % EIB 6 1/2 01/05/ ,037,000 Government SUPRANATIONAL HUF ,500,000, % ESKOM 9 1/4 04/20/ ,000 Utilities SOUTH AFRICA ZAR ,000,000, % KOMINS /07/ ,000 Government SWEDEN MXN ,000, % THAIGB 5 1/8 03/13/ ,004,000 Government THAILAND THB ,632,000, % THAIGB 3 7/8 06/13/ ,000 Government THAILAND THB ,994,000, % TURKGB 10 1/2 01/15/ ,000 Government TURKEY TRY ,547,000, % Source: VanEck, Knight as of 3/8/2013

36 Commodities Baskets Precious metals Mostly in-kind Other metals, energy, softs, broad Futures/cash

37 Leveraged & Inverse Baskets Leveraged In-kind and/or cash Inverse Cash

38 Live Trading

39 Thank You. Questions?

40 Live ETF Trading: Institutional Strategies for Best ETF Execution Dave Nadig, Session Leader President, ETF Analytics IndexUniverse Matt Hougan, Session Leader Executive Vice President, Global Head of Content IndexUniverse Bill Ahmuty, Presenter Director, ETF Trading Societe Generale Christopher Johnson, Presenter Director, Listed Derivatives Sales Knight Capital Group