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FLASHBACK FRIDAY: ArcaEx Becomes EFT Electronic Strongman

Flashback Friday sponsored by Instinet

Traders Magazine Online News, October 27, 2017

John D'Antona Jr.

Exchange traded funds (ETFs) are all the rage these days as investors scour the trading landscape looking for yield and liquidity as individual stocks have become increasingly expensive.

But where does the buy-side go to find the best price, transparency and selection of these instruments. Back in 2002, it looked to be NYSE’s Arca exchange. But does that still hold true? Or is there some other venue that affords a better proposition?

According to Spencer Mindlin, Capital Markets Analyst at Aite Group, the buy-side still views ETF transparency as paramount and there are more choices to choose from when trading. 

“While cost, transparency, and liquidity are all important considerations when investing in ETFs, not all investors will value these three the same way,” Mindlin explained. “Still, increased transparency generally leads to improved product tradeability and tighter spreads. But for some investors, futures may still deliver a higher degree of quote transparency than ETFs.”

However, no two investors are alike and neither are their desires or goals. Mindlin told Traders Magazine in a recent interview that most investors currently utilizing ETFs value the transparency that ETFs provide highly. But other investors, particularly long-term investors looking to invest in active strategies, may prefer the protection that a non-transparent ETF wrapper affords their portfolio manager.

“A lot of people remain skeptical and have said non-transparent ETFs are a solution looking for a problem,” he said. “I disagree and anticipate interest in non-transparent ETFs will grow over time, particularly once active management gets back in vogue. Stay tuned for active's perfect storm: rising interest rates, changes in public policy, and incorporation of alternative data and artificial intelligence into active strategies.”

And what about liquidity? Isn’t that king for single name stocks?

“ETF liquidity is easy to observe for the top 50 traded products by simply looking at exchange volumes, Mindlin said. “And institutional investors may never invest in an ETF if it isn't the most liquid product. But, investors need to understand the true liquidity measure for an ETF is its implied liquidity, which is a measure of the liquidity that can be manufactured by market makers trading the ETF, futures, and/or its underlying stock. And this is why issuers think carefully about how they construct the ETF's portfolio, as it directly affects the liquidity of the ETF.”

Taking all these things into consideration about today’s ETF market and what the buy-side wants, is Arca still the strongman it was back in 2002?

“NYSE Arca continues to be the king of the hill with over two-thirds of the ETF listings, but competition is heating up,” Mindlin said. “Cboe Global Markets is getting very aggressive and attracting NYSE defectors. Cboe Global Markets (in this case) BATS has been particularly aggressive to try and attract listings and proposed closing auction product has the potential to grab market share away from the big board. And NASDAQ is trailing, but is also investing heavily to attract ETF listings.”

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