ETF Liquidity in Focus 3 Views on Trading ETFs

Transcription

1 ETF Liquidity in Focus 3 Views on Trading ETFs Moderator: DAVE NADIG Chief Investment Officer ETF.com Panelists: MICHAEL BARADAS Product Manager for Cross-Asset Strategies & ETF Solutions Bloomberg Tradebook CLAYTON FRESK Portfolio Management Analyst Stadion Money Management CHRIS HEMPSTEAD Head of ETF Sales KCG

2 ETF Liquidity in Focus: 3 Views on Trading ETFs CLAYTON FRESK Portfolio Management Analyst Stadion Money Management

3 Firm Overview Founded in 1993 $5.1 Billion AUM as of 12/31/14 Six 40-Act Mutual Funds covering equity (domestic and international) and fixed income spectrum Separately Managed Accounts Stadion Retirement Via Insurance Separate Accounts and CITs Other Institutional, Variable Annuity, Non-Discretionary Models

4 Trading Overview Most strategies Tactical to some degree As such, can experience large amount of trading relative to AUM 2014: $30 Billion traded based on model reallocations $900 Million traded based on cash flow rebalancing 2013: $40 Billion traded based on model reallocations $630 Million traded based on cash flow rebalancing Can hold in excess of 80 ETF names at any given time

5 Rebalance Trading Usually small trades absolute and relative to ETF AUM/ADV Normally trade via electronic Various standard strategies/algorithms utilized (i.e. VWAP)

6 Model Trading Usually large in absolute size Can vary in size relative to AUM/ADV based on strategy being traded Potential strategy can vary based on buying or selling For those large relative to AUM/ADV, look at attributes such as: Exposure being traded (domestic equity, international equity, fixed income, etc.) Screen Liquidity Implied Liquidity

7 Example: RSP 30d ADV: 1.5M Implied Liquidity: 39.7M More liquidity in underlying constituents than ETF itself Screen Liquidity

8 Model Trading Most important: Communicate/Work with partners on the street Authorized Participants, Liquidity Providers, Issuer Capital Market Groups Get in-depth market intel and inside viewpoints on trading characteristics Access to numerous other market participants if necessary Access to and open dialogue on various implementation mechanisms: Trade on risk, Work trade, Combination Post trade analytics

9 Disclosures Stadion Money Management, LLC. (Stadion) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of Stadion manages investment portfolios using a quantitative technical based model, and primarily manages qualified retirement assets. Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion s investment strategies may lose money. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions. SMM

10 ETF Liquidity in Focus: 3 Views on Trading ETFs CHRIS HEMPSTEAD Head of ETF Sales KCG

11 Current Bid/Offer Arbitrageurs need current bid and offer valuations. NAV represents a historic last-traded price.

12 ETF Trading 1,2,3 Work out your trade o ETF selection

13 ETF Trading 1,2,3 o Mis-priced ETFs o Large ETF trades o Tricky ETF trades ETFs trade fractions of their basket value 12

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15 ETF Spreads

16 Volatility

17 Stock Spreads

18 A Checklist of Sorts: 1. Index Provider 2. Distribution/Sales 3. Exemptive relief 4. Subadvisor 5. Exchange listing 6. Market Makers

19 ETF Liquidity in Focus: 3 Views on Trading ETFs MICHAEL BARADAS Product Manager for Cross-Asset Strategies & ETF Solutions Bloomberg Tradebook

20 LIQUIDITY The Elephant in the Room

21 Liquidity

22 Market Impact Arrival Price: can be measured, can be managed It s the relative size that matters Increasing Costs

23 ETFs Do Not Trade Like Stocks Market impact of ETFs is significantly lower than stocks ETF orders can be more aggressive Increasing Costs

24 ETF Algos vs ETF Blocks ETF block trades have lower market impact than algorithms Greater than 1% Average Daily Volume (ADV), consider blocks Increasing Costs

25 Seeking Optimal Execution ETFs exhibit very different trading characteristics than common stocks Order Size/ADV Optimal Method to Achieve Lower Market Impact [0%, 1%] Algorithmic Trading [1%, ] Block Trading

26 Challenges of Block Trading Manual Process (Phone, Chat) Speed matters Lack of anonymity SOLUTION Automation 1-click anonymous access Fragmented Market for Blocks Sell-Side Liquidity Providers Buy-Side Liquidity Providers (Volcker Rule) Measuring Cost Implicit Cost How do you improve? SOLUTION SOLUTION Aggregation Multiple Competing Buy-Side Liquidity Providers Transparency Audit Trail and TCA

27 Transparency Recommend ETF-optimized algorithms ETF relevant statistics: Creation Unit INAV Implied Liquidity Fund Flows %Off- Exchange

28 RFQ Streaming Actionable Quotes Block Quantity

29 Aggregation

30 Bloomberg Tradebook Michael Baradas