Tag Archives: ETFs

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Nasdaq Bets on Blank-Check Co. IPOs To Boost Listings; SPACs are Sizzling

Competition for listings is a contact sport in the world of major stock exchanges as evidenced by the assortment of US bourses vying to increase market share in exchange-traded fund (ETFs), which represent nearly 2000 securities or more than half of all equities listed on major US stock exchanges.  While the NYSE has long been the place-to-list for issuers of ETFs, Nasdaq has proven to have sharp elbows in not only soliciting ETF issuers (with BATS taking a distant third), Nasdaq now has another card up its sleeve-the exchange operator is aiming at another listing product known as blank-check companies and is aggressively biting at the heels of Intercontinental Exchange Inc.’s NYSE, which has carved out a niche in the listing of these companies, more formally known as Special Purpose Acquisition Companies aka SPACs ™. In an effort to grab market share in this product away from NYSE and boost IPO listings (and hence more fees from Issuers and more revenue from distributing market data) Nasdaq recently filed proposed new rule changes with the SEC that will make it easier for SPACs ™ to list on that platform.

According to reporting by Alexander Osipovich of the WSJ, 22 blank-check companies have floated IPOs so far this year, raising nearly $7bil.

Special Purpose Acquisition Vehicles are shell companies that raise funds via a public offering whereby the proceeds are managed by a pre-selected team of industry-specific executives who receive an equity stake in the shell and are charged with acquiring an existing private company or in some cases, several private companies and roll those companies into the existing publicly-traded entity. In the event an acquisition cannot be identified and approved by an overwhelming majority of the shareholders within [typically] 24 months of the IPO, 95% of the funds raised are returned to the shareholders.

The investment vehicle construct was first created in the 1970’s, but soon fell out favor after regulators uncovered widespread abuse by operators of  blank check company managers, which led to multiple cases of securities fraud charges against many different firms.  The blank check model was later refined in the early 1990’s by GKN Securities, whose principals created a much tighter construct and trademarked the SPAC™ acronym. GKN successor firm boutique investment bank Early Bird Capital since carried the torch of its predecessor; during the past ten years, Early Bird has underwritten and/or co-managed nearly 75 SPAC™ IPOs that have raised over $4bil.

Early Bird’s early success has not gone unnoticed by leading Wall Street firms; 6-pack investment banks Goldman Sachs, Merrill Lynch, and Deutsche Bank among others have crowded into the space that Early Bird Capital forged. In 2017 alone, SPACs™ have raised nearly $4bil for an assortment of acquisition-minded firms.

According to Paul Azous, CEO of Prospectus.com, a consultancy that assists companies throughout the course of preparing investor offering documentation and via a captive network of securities attorneys, the firm also advises companies seeking to list on stock exchanges, “The blank-check concept is in vogue once again, and we’re working with at least two clients who have targeted specific industries that are seemingly ripe for roll-up.” Added Azous, “With Nasdaq easing the listing burdens, strategy of creating a public shell that can with reasonable ease, roll a private company into that publicly-listed entity should provide a good shot-in-the-arm to IPO activity, which has experienced fits and starts in each of the last several years.”

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One More Corporate Bond Electronic Trading Platform; Still None Include Bond ETFs

Well Matilda, as if the universe of corporate bond electronic trading platforms isn’t crowded enough, despite clear signs of consolidation taking place for this still nascent stage industry (e.g. upstart Trumid’s recent acquisition of infant-stage Electronifie) , one more corporate bond e-trading platform has its cr0ss-hairs on the US market. The latest entrant is UK-based Neptune Networks, Ltd., a consortium controlled by sell-side investment banks that has inserted electronic trading veteran Grant Wilson as interim CEO. Neptune’s lead-in value proposition’ is perfecting the IOI approach to capturing liquidity, and also offers a tool kit of connectivity schemes that bridge buyside and sell-side players.

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Grant Wilson, Interim CEO Neptune Networks

Promoting indication-of-interest orders ( pre-trade real-time AXE indications) as opposed to actionable bid-offer constructs that are ubiquitous to equity trading platforms, is a technique that other US-based corporate bond trading platforms are already advancing. Neptune is also not alone in their positioning an ‘all-to-all’ model as a means to inspire buy-side corporate credit PMs and traders to embrace electronic trading, a seemingly counter-culture technique that enables them to swim in the same pool as sell-side dealers aka market-makers. The distinction that Neptune brings to the table is girth and size, thanks to its sponsors Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, UBS, Citi and Deutsche Bank, each of which maintain board seats.  Unlike the other players in the space that are focused on building a “round lot marketplace” (as opposed to retail size orders that MarketAxxess (NASDAQ: MKTX) specializes in, Neptune carries over 14,000 individual ISINs daily, claims that its average order size is 5mm,  total daily gross notional in excess of $115bn, and according to Neptune’s marketing material, over 22,000 individual ISINs have been submitted to the platform since January 1st.

Lots of e-bond trading platforms, but none are incorporating bond ETFs, at least not yet.

As compelling as Neptune’s value proposition is, some corporate bond e-trading veterans are quietly wondering whether these initiatives are somehow missing the memos being circulated throughout the institutional investor community profiling the rapid adoption of corporate bond ETF products in lieu of their long-held focus on individual corporate credits.

According to e-bond trading veteran Jay Berkman, who helped launch BondNet in 1994 when it was the industry’s very first web-based exchange platform for investment grade and high yield bonds, and who now serves as an advisor to fintech merchant bank SenaHill Partners, the firm that has led early fund-raising rounds for  Trumid,  Electronifie and  EMbonds  (SenaHill also advised on the recent Trumid-Electronifie combination), “Anyone who follows the trends [and follows the money] can’t help but appreciate that a broad assortment of Tier 1 investment managers, RIA’s and even public pensions’ use of bond ETFs is increasing in magnitude by the week, not the quarter. Added Berkman, “If you’re operating an electronic exchange platform for corporate bonds, and your users are rapidly increasing their use of fixed income exchange-traded funds, having a module for ETFs would seem to be a natural next step.”

Others in the industry have suggested to MarketsMuse reporters that enabling users to trade the underlying constituents against the respective corporate bond cash index along with a module for create/redeem schemes, or even a means by Issuers can distribute new debt directly seems to make “too much sense.”  But then again, these same industry experts acknowledge the political landmines that would most assuredly be encountered by those trying to disrupt and innovate within corporate bond land are perhaps too much for those who need to prove their business models before aiming at new frontiers. Continue reading

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Bats Europe Enables Direct Access for Buy-Side Managers

According to MarketsMuse market structure mavens, if you can say “dis-intermediate” five times in under 5 seconds, or if you can simply spell the word (without looking at this blog post), then “you’ll get the joke” i.e. exchange operator Bats Global Markets (acquired last year by CBOE for $3.2bil) is a disrupt-or. After sell-side firms were given direct access to a new block trading service for the European equity market launched by stock exchange operator Bats Europe in December,  it was just revealed that starting next month, buy-side asset managers will gain direct access to the same block trading platform. The pending roll-out will enable buy-side traders to submit their own Indications of Interest (IOIs) so as to reduce information slippage.

Bats Europe licensed technology from Bids Trading, the largest block trading ATS by volume in the US to launch Bats LIS (Large in Scale) in December. Per reporting from Markets Media….

Dave Howson, chief operating officer at Bats Europe, told Markets Media that average trade size has grown to more than €1m over the past month since sell-side firms were given direct access to Bats LIS. He added: “We have eight to ten brokers regularly utilizing the platform with additional participants joining all the time.”

Buy-side firms have been able to access Bats LIS through a broker but the service is being rolled out so asset managers also have direct access.

Dave Howson, Bats

“Over the next month, buy side will have direct access to submit indications of interest into the Bats LIS platform,” said Howson. “One of the key benefits of the platform is that the buy side control their IOI up until it is matched before turning it over to a designated broker for execution, which means information leakage in minimized.”

Under MiFID II, the new European Union regulations which come into effect in January next year, block trades above a specified minimum size can trade under a large in scale waiver which allows market participants to negotiate trades without the need to make quotes public to meet the pre-trade transparency requirements. The ability to trade large blocks will become even more important as MiFID II also places volume caps on trading in a dark pool without a waiver.

Another MiFID II compliant service for block trading that has been introduced by Bats Europe is the Periodic Auctions book. Launched in October 2015, the Periodic Auctions book is a separate lit book that independently operates intra-day auctions throughout the day. Howson said: “A priority is to change the structure of our Periodic Auction order book to optimise the duration of the auction, which should result in increased order matching.”

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He continued that another priority in Europe is to increase the volume of trading of exchange-traded funds, which should be boosted by the MiFID II requirements to report ETF trading. Howson added: “The new trade reporting obligation under MiFID II will increase transparency in ETFs so should we expect to see an increase trading of these products on trading venues.”

In June last year Bats launched a new indices business with the introduction of a UK-focused benchmark index series of 18 different indices. In December, Bats added eight indices for the French, German, Italian and Swiss markets bringing the total number of European indices managed by Bats to 26.

“We are currently focused on building European coverage with our indices,” added Howson. “Further down the road we’ll look to create products on the back of the indices, but right now we’re focused on expanding our reach.”

Bats Europe operates a trade reporting facility, BXTR, which will be registered under MiFID II.  BXTR reported more than €4.8trillion in transactions last year.

To continue reading Markets Media coverage, click here
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Buy-Side Beefs Up Use of ETF Products; They Finally Get The Joke

ETF product use among the Buy-Side is no longer viewed as “just a portfolio re-balance or transition management tool,”  according to a survey of the investment industry’s largest portfolio managers. More PMs than ever are finally ‘getting the joke’ with regard to the value proposition of Exchange-Traded Funds (ETFs), according to a recent report by State Street Global. The up-trending holdings of ETF products across the institutional manager community is attributed to a variety of reasons that include better product education, the ongoing search for alpha, the need to reduce single-stock exposure, and according to Europe-based fund managers, ETF products are ideal vehicles to express global macro investment views.

According to recent research from State Street Global, 85% of investment professionals are using exchange-traded funds (ETFs) to gain exposure to individual sectors or industries. More than one-quarter of survey respondents (26%) report that over 20% of their assets under management are allocated to sector/industry ETFs.

This research is based on State Street Global Advisors’ Survey of Investment Professionals’ Sector and Industry Investing Attitudes and Usage, completed in the first quarter of 2016. The study comprised web-based interviews with 419 financial advisors and wealth managers.

While it is hard to compare the two conventionally – the average daily amount of stock trading as measured by Bats Global runs around 7.30 billion shares compared to 1.3 billion for ETFs, the latter reported by SSGA. When compared on a notional dollar basis, ETFs hit $13.1 billion versus $48.5 billion for stocks.

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The estimated value of all ETF shares issued exceeded that of shares redeemed by $5.60 billion for the week ended October 26, 2016, the Investment Company Institute recently reported. For ETFs backed by equities, for the week ended November 1 net issuance hit $5.23 billion for the week, compared to estimated net issuance of $2.38 billion in the previous week. Domestic equity ETFs had estimated net issuance of $4.03 billion, and world equity ETFs had estimated net issuance of $1.19 billion.

Nick Good, co-head of the Global SPDR business at State Street Global Advisors, told Markets Media that the research pointed a rosy picture for ETFs going forward. He said the survey found that the use of sector and industry ETFs is highest among private wealth managers, with 92 percent reporting they had some exposure to the sector and/or industry funds; followed by independent/regional broker dealer advisors (87 percent), National Broker Dealer advisors (86 percent) and Registered Investment Advisors (80 percent).

“The most important variables these investment professionals consider when choosing a specific sector or industry ETF are liquidity, expense ratio and the fund’s holdings,” he said.

Looking ahead, 45 percent of financial advisors surveyed report they plan to increase usage of ETFs while another 50 percent said they plan to maintain their current allocation of sector and industry ETFs in the future.

Advisors’ top reasons for incorporating sector and industry ETFs into client portfolios include:

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japan fintech sector fever

Land of Rising Sun Embraces FinTech Sector; Japan’s Biggest Banks Open Wallets

The FinTech Sector is red hot now in Japan as Land of Rising Sun Banks now looking to pour hundreds of millions of dollars into fintech start-ups after the abolition of a law that prevented them from owning more than 5 per cent of a technology company.

(FT) 25 September The changes are part of a national effort to push into the fintech sector and pursue investments in financial technology startups, highlighting fears in Tokyo that Silicon Valley could decimate Japan’s banking sector as it did the country’s mobile phone industry.

“Japanese institutions are concerned that a Google Bank or Facebook Bank will conquer Japan,” said Naoyuki Iwashita, head of the FinTech Centre at the Bank of Japan.

It means that Japan could become a big new source of funding for start-ups, especially in Asia, that are experimenting with technologies such as blockchain or artificial intelligence.

Yasuhiro Sato, chief executive of Mizuho, told a conference in Tokyo last week that Japanese banks had been constrained by regulators wanting to preserve old, but tried-and-tested, IT systems.

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Yasuhiro Sato fintech
Yasuhiro Sato (photo courtesy of WSJ)

“I think [regulators], especially the Japanese Financial Services Agency, are now changing their thoughts on that,” he told the FinSum conference, organised by the FSA and Nikkei, owner of the Financial Times.

The change in the law means banks can ignore a 5 per cent limit on stakes in non-financial companies if their purpose is to apply information technology to finance.

The FSA is considering a further legal change that would make it easier for fintech companies to engage in regulated financial activities. “In order to obtain more technological advances from outside participants,” said Mr Sato. “That’s the reason why the banking law will now quite likely be changing.”

Mizuho established a presence in Silicon Valley three years ago and this year added an innovation-focused office in New York. Mr Sato said the rule changes would accelerate that. “We have created a specific team, which is the innovation product team, to make significant investment in venture companies. We are sending many many persons to the US.”

Rakuten, the Japanese ecommerce group, has launched a $100m fund to invest in fintech companies and SBI Holdings, a financial group, raised a ¥30bn ($299m) fintech venture fund earlier this year.

Other global banks have opened outposts in California. BBVA, the Spanish bank, is one of the most aggressive, acquiring Simple, an Oregon-based digital lender in 2014, and investing in Prosper, the San Francisco-based peer-to-peer platform. It also set up a venture capital company, Propel Ventures, to pursue investments in other start-ups. SenaHill is a leading merchant bank boutique specializing in fintech initiatives and focused on fast growth companies that are producing revenue and/or startups that have at least one year of business operating metrics.

To continue reading the story Land of Rising Sun Embraces FinTech Sector from FT.com, please click here

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CME Launches Tool To Compare ETF Pricing vs Futures

(Traders Magazine)-CME Group, the US derivatives exchange, has launched an online tool to allow investors to compare the costs of futures against exchange-traded funds, as some ETF issuers have claimed the funds are now cheaper to use.

Last month the CME launched the Total Cost Analysis tool to allow investors to compare the all-in costs of replicating the S&P 500 by trading equity index futures versus ETFs, and intends to expand the tool to other indexes.

Tim McCourt, global head of equity products at CME Group, told Markets Media: “The online tool gives customers the flexibility to compare costs for specific variables such as commissions, trade size and time period.”

The tool focuses on three different components of the total cost of trading – transaction costs, implementation costs and holding costs. McCourt claimed that for an active trader on a short time horizon, futures are overwhelmingly cheaper on a total cost of trading basis, which includes both fees and market impact but in certain circumstances, over different time periods, this could change.

Source, the European ETF issuer, had issued a paper in April, “ETFs vs Futures”, which said futures have become more expensive due to bank regulation while ETFs have become cheaper due to increased competition. The paper said that futures costs have been cheaper recently, this is expected to change. “We expect that, as volatility reduces, the usual imbalance between buyers and sellers in the futures markets will resume and futures costs will return to the levels we saw between 2013 and 2015,” said the report.

In addition Source said futures are particularly expensive relative to ETFs at the December roll as banks have less risk appetite at the financial year-end. “For investors planning to hold an exposure over the December-March period, it may make sense to buy ETFs instead of futures,” added Source.

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Pac-Man Time for ETF Issuers

If you thought the ETF Issuers industry is getting crowded, you are right. While the barrier to entry is relatively low, the path to traction-measured by AUM can prove rocky, if not populated with land mines. What’s an Issuer to do? Join the Pac-Man Party and sell out what you’ve built to those with a fresh perspective who want to Pass Go and collect the $200 (metaphorically speaking) without having to start from scratch. MarketsMuse gives a shout-out to P&I contributor Randy Diamond for the following update..

“More and more money managers are looking at a way to get into the ETF marketplace,” he said. “The fastest way to do that is through an acquisition; buy something already out there.”

Small ETF providers might have little market share, but that hasn’t stopped them from being acquired by larger active money management firms looking for a quick way to enter or expand their exchange-traded funds business.

Hartford Funds, Radnor, Pa., announced May 17 its purchase of Lattice Strategies, a San Francisco firm known for its smart-beta ETFs. Just a week earlier, Columbia Threadneedle Investments, Boston, said it would acquire New York-based ETF provider Emerging Global Advisors.

The two announcements by money management firms are the latest in a string of deals that began in late 2014.

At least two more ETF providers will be sold in 2016 to money managers, predicted investment banker Donald Putnam, a managing partner at San Francisco-based Grail Partners LLC. Mr. Putnam said likely buyers will be firms with 20% to 40% of assets under management in mutual funds. “A lot of it has to do with pivoting existing mutual funds into ETF clones, a lot of it has to do with taking asset management styles that are not in mutual funds and putting them in ETF form initially rather than in old-fashioned mutual fund form,” he said.

Mr. Putnam wouldn’t say which ETF companies he believes are ripe for acquisition, but Reggie Browne, senior managing director and head of ETF trading at Cantor Fitzgerald LP, New York, said potential acquisition targets include AdvisorShares Investments LLC and WisdomTree Investments Inc., New York.

AdvisorShares, Bethesda, Md., with $1.2 billion in assets under management, is the more typical size of ETF managers being acquired. Publicly traded WisdomTree, on the other hand, is the largest independent ETF company in the U.S., with $42 billion in assets under management.

Jan van Eck, president and CEO of New York-based VanEck Global, an ETF company with $23.7 billion in U.S. ETF assets, said in the past year he has talked to at least 10 managers interested in acquiring an ETF company. “We stay in touch with potential strategic partners and investors, but we don’t see a reason for a transaction,” he said. “We think we can grow sufficiently as an independent company.”

Capture a slice

Todd Rosenbluth, a New York-based senior director and director of ETF and mutual fund research at S&P Global Market Intelligence, said as asset flows continue to move from active management and into areas such as ETFs, active managers are trying to position themselves to capture a slice of the growing business.

“More and more money managers are looking at a way to get into the ETF marketplace,” he said. “The fastest way to do that is through an acquisition; buy something already out there.”

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SEC Chair White: “I Have A Dream..”

SEC Mary Joe White has a dream, and even if she aspires to leverage the inspirational outlook of  Dr. Martin Luther King, securities industry members are debating whether her dream could prove to be a reality any sooner than the civil rights agenda expressed by Dr. King so many years ago.  In a series of comments during the past several weeks from Chairperson White regarding the SEC’s agenda for the remainder of her tenure as President Obama’s designated SEC Chairperson, Ms. White, who is operating with only 3 of 5 Commissioners until two open vacancies are filled before the Second of Never,  she is vowing one of the top three items on her list includes “better understanding exchange-traded funds aka ETFs before the SEC approves prospectuses.” That makes sense.

One only wonders why that elementary concept had never occurred to any one previously—despite repeated calls from among others, former SEC Commissioner Steve Wallman (1994-1997) who has long questioned the approval process for many of the complex exchange-traded products the SEC has rubber-stamped, including inverse and commodities-related products that even professionals often do not understand.  Since his departure from the SEC, Wallman has proven adept at doing the right things while serving at the helm as Founder/Chairman/CEO of the investment firm Foliofn.com.

Other matters of importance according to White include “the desire on part of SEC to introduce “fiduciary definitions for registered advisers and brokers..” which in plain speaks means : White’s agenda is to figure out how to completely change the culture of the securities brokerage industry by forcing people to be ethical and moral. MarketsMuse sources have indicated White is proposing to have those folks swear an oath that says:

“My first obligation is to protect my clients’ interest above all else and to make sure I never even think of trying to sell them something that might be inappropriate for their goals or possibly even toxic—despite the fact my office manager says I have to sell house product only or I’m out of a job. After I meet that first obligation, my second obligation is to then make enough money to pay for my kids college and have enough left over for that condo in Florida.”

Insiders familiar with White’s agenda have told MarketsMuse that she has acknowledged her seemingly altruistic mission is not without challenge or headwinds given that the “securities industry at large is much like the NRA when it comes to influential prowess.”

Directly and indirectly, Wall Street firms and its executives contribute hundreds of millions of dollars every year to lobby SEC Officials and members of Congress(which the SEC reports to) on behalf of their interests—which presumably includes two big drivers that have driven the investment industry since the days of Joe Kennedy Sr.: (i) selling investment vehicles that look great on paper and in marketing collateral [even if they might or might not prove to be toxic at some point and might or might not be appropriate for a specific individual given that people’s moods change a lot] (ii) how to pay the mortgage on the brokers’ first house, the $200k for each of their kids college tuition bills, the country club memberships that provides venues in which to sell those investment products,  sharpen up the golf game, and of course, pay for the second and third homes, etc etc.

Another item on White’s laundry list is to expand the  exam program for registered brokers and advisers. Currently, 10% of the nearly 12,000 advisers sit and take ‘refresher tests’ that are abridged versions of the Series 7—an exam that has approximately 40% brokers FAIL the first time and 30% fail the second time. Some could argue the test is maybe too difficult, given the national average score is 67 vs. a passing grade of 72. Or, one could argue the barrier to entry to become a registered broker or adviser is simply being a good test taker. Idiots and Muppets can get licensed, as long as they take 8 practice exams the night before the actual exam and memorize the correct answers. So, Chairperson White wants more folks taking more tests; a good thing for the SEC because this is big a revenue-generator for the Agency—which has repeatedly claimed it does not have enough money to even pay for air conditioning in its Washington DC office. Staff members have said this alone is vexing, given that SEC examiners and enforcement agents have become accustomed to keeping windows wide open five months of the year and continuously grapple with files on their desks blowing out of their windows and many of those files pertain to complaints filed by investors and updated paper notes sent by from enforcement agents in the field via courier pigeons.

Courtesy of  an admittedly more illustrious news media outlet than MarketsMuse might be, the following is ‘official coverage from InvestmentNews.com:

(InvestmentNews) Despite missing two of its five members, Securities and Exchange Commission Chairwoman Mary Jo White said Friday the agency will forge ahead on rules to raise investment-advice standards and enhance oversight of advisers.

“At the moment, as you know, we are a commission of just three members, but — as has occurred in the past — we can carry forward all of the business of the commission,” Ms. White said at the Practising Law Institute conference in Washington. “And, while we look forward to welcoming new colleagues, Commissioners Stein, [Michael] Piwowar and I are fully engaged in advancing the commission’s work.”

The Obama administration has nominated Republican Hester Peirce and Democrat Lisa Fairfax to replace two members who have departed the SEC, Republican Daniel Gallagher and Democrat Luis Aguilar, but the Senate has not yet begun the confirmation process. Continue reading

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Bank Trading Desks Merge Bonds and ETFs

Corporate Bonds and exchange-traded funds is a combination that first seemed counter-intuitive to the select universe of traders who are actually fluent in both corporate bond trading and equity trading; two practice areas that are distinctively different. “Stocks are bought and bonds are sold” as they used to say, and the nuances of trading these distinctive asset classes in the secondary marketplace have long been at odds with each other.

This explains why fixed income traders from both the buy-side and sell-side rarely even knew their equity-trading counterparts, no less engaged in cross-asset trading. But thanks to shrinking trading profit margins, Wall Street trading desks now ‘get the joke’, and per story below, are bolstering their business models.

(REUTERS) Feb 18 Wall Street banks are ramping up businesses that trade exchange-traded funds full of bonds, a bright spot of growth at an otherwise bleak time for trading but one that may carry unappreciated risk.

Barclays PLC, Credit Suisse Group AG and Goldman Sachs Group Inc have all created special teams to make markets in bond ETFs. The teams include staff across stock and bond markets, since the ETFs trade like stocks on stock exchanges, but their underlying securities are bonds.

All told, 12 to 15 banks now have a presence in the business, whereas a few years ago almost none did, said Anthony Perrotta, global head of research and consulting at TABB Group.

“There are a lot of institutions that, even though they might be retrenching in fixed-income trading, are looking at ETFs as a way to galvanize their business,” said Martin Small, who oversees U.S. operations for BlackRock Inc’s iShares unit, which is the largest ETF issuer.

Although these businesses are sprouting up across Wall Street, they are unlikely to make up for huge profits banks earned during the glory days of bond trading, at least not anytime soon.

Investors pay banks 0.01 percent to 0.03 percent to trade a bond ETF, according to TABB Group, compared with 1.03 percent for an individual bond. Traders say they are hoping to make up for piddling margins by selling more of the product, since the ETF business is a bulk-volume one that is rapidly growing.

The sales push comes after years of pressure from leading ETF creators like BlackRock and State Street Corp to make markets for the bond ETFs. Those firms rake in billions of dollars’ worth of revenue from ETFs each year, and view bond ETFs as a way to grow their own businesses.

Firms that create ETFs need banks to act as intermediaries for sales, and also to ensure that prices are in sync with underlying securities. Before banks entered the market, trades were handled by market-makers like KCG Holdings Inc, Cantor Fitzgerald and Susquehanna Capital Group, who have been in the business for years.

As Wall Street has warmed to bond ETFs, the market has quickly grown. Assets under management in the U.S. rose 44 percent to $372 billion at the end of January from $258 billion a year earlier, according to fund research service Lipper. That represents about 19 percent of the broader $2 trillion U.S. ETF market.

While the bond-ETF boom may be good for Wall Street, it is not without risk.

It comes at a time when liquidity in the corporate bond market has shriveled due to new rules that require banks to hold a lot of capital against those securities. As a result, banks avoid buying bonds from investors unless they can resell them quickly, and do not maintain much inventory for interested buyers.

Despite their holdings, bond ETFs trade more like stocks, on stock exchanges, so they are not facing the same type of liquidity issue. But it is unclear how they will perform if investors rush for the exit all at once, or if markets come under serious stress. During the Aug. 24 “flash crash,” for instance, some ETFs failed to trade properly.

The full story from Reuters is here

tradeweb-muscles-into-etf-electronic-execution-space-marketsmuse

TradeWeb Muscles Into ETF Execution Space

Fixed Income trading platform TradeWeb, best known for its dominant role administering OTC government securities trading between global banks and institutional customers is muscling into the world of ETFs. Tradeweb has just launched an electronic over-the-counter marketplace for trading exchange traded funds using a “request-for-quote” aka “RFQ”- based platform that is modeled after a platform Tradeweb successfully launched in Europe in 2012.

Tradeweb’s new U.S. platform is designed to be a fully-automated alternative to phone- and chat-based over-the-counter ETF trading of institutional-sized or less liquid orders. Tradeweb clients can use the platform to send RFQs to up to five dealers at a time, using either one- or two-way price quotes. The platform offers aggregated pre-trade price transparency from liquidity providers and National Best Bid and Offer exchange pricing. The platform can also seamlessly connect to third-party and proprietary order management systems, and risk management systems to enable market participants to fully automate workflows. There are now 11 leading liquidity providers on the platform, according to a company announcement.

In Europe, where ETF liquidity is relatively fragmented, Tradeweb’s platform has become one of the largest pools of ETF liquidity. The European platform supports more than 45 percent of OTC electronic trading and the platform’s daily volume exceeds €500 million (approximately $5.6 million) per day. In the U.S., ETF liquidity that trades on exchanges is more centralized, but Tradeweb’s platform is the first fully-electronic platform for trading institutional-sized or less liquid orders through dealers.

chris hempstead
Chris Hempstead, KCG

“The Tradeweb ETF platform offers a new channel for liquidity and enhances our suite of execution capabilities,” said Chris Hempstead, head of ETF sales for KCG. “The platform represents a novel approach to improving price discovery as well as an innovative way to execute larger-size trades, while reducing the risk of materially impacting pricing.”

Institutions were early adopters of ETF and now hold about 34 percent of U.S. ETF assets, according to November data from State Street Global Advisors and Broadridge. As institutional OTC trading of ETFs continues to grow, market participants say pre-trade transparency into institutional-sized liquidity, and more streamlined, automated workflows are a next step.

“Leveraging electronic solutions to streamline over-the-counter trade workflows is an important step forward for the ETF industry. The combination of a robust exchange traded marketplace with an electronic, transparent OTC market delivers institutional investors choice in how they access liquidity,” said Leland Clemons, managing director at BlackRock iShares.

Tradeweb clients in the U.S. will be able to use the new platform to access all U.S.-listed ETFs, including fixed income ETFs, as well as European-listed ETFs.

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NYSE Hold on ETF Business Slipping?

(Bloomberg LP)-NYSE Group Inc. may still be the king of exchange-traded funds among U.S. stock markets, but their hold on the ETF business might be slipping as Issuers, including BlackRock seek other listing venues and challengers to the throne are gaining ground.

Last year, a record 23 ETFs left the company’s NYSE Arca exchange, shifting their listing to rival markets, according to data compiled by Bloomberg. BlackRock Inc., the world’s largest asset manager, this month said it was diversifying by moving 11 iShares ETFs away from NYSE Arca, the first time it’s yanked funds from the exchange.

While the vast majority of ETFs still list at NYSE Arca — its funds amount to about 94 percent of the total market value of all U.S. ETFs — other exchanges are making inroads as investors increasingly use the products. Bats Global Markets Inc. handles about a quarter of U.S. ETF trading, more than any other exchange operator, and Bats has listed 10 new funds this year, versus one at NYSE Arca and one at Nasdaq Inc.

“The growth in ETFs in terms of assets and trading volume has obviously caught the attention of exchanges looking to build their listing businesses,” said Eric Balchunas, a Bloomberg Intelligence analyst.

Among the ETFs BlackRock will relocate are the $13.9 billion iShares MSCI Eurozone ETF and the $8.1 billion iShares 20+ Year Treasury Bond ETF. “A big issuer and a big ticker moving over, that’s really helpful for these exchanges to build their credibility and make other issuers feel comfortable,” Balchunas added. “Having a few of those studs can go a long way.”

The wild trading session in the U.S. stock market on Aug. 24 has drawn attention to ETFs, and may factor into listing decisions. The U.S. Securities and Exchange Commission said trading rules on NYSE Arca exacerbated volatility that day. In its 88-page analysis of Aug. 24, the SEC pointed out that NYSE Arca’s allowable price bands limited how quickly ETF prices could recover after trading halts. The bands, which NYSE Arca later proposed to widen, may have caused additional delays by limiting faster price adjustments, the regulator said. BlackRock expressed its support for NYSE Arca’s rule change in a letter to the SEC.

Bats Global Markets has been edging into ETF listings by paying issuers to choose its platform. The company launched the Bats ETF Marketplace last year, charging no listing fees to issuers and offering to pay them up to $400,000 per year for their listings, based on average daily volume. The exchange also poached Laura Morrison, an executive from NYSE’s ETF division, in April.

For the full story from Bloomberg reporter Annie Massa, click here
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European ETF Strategy Unraveling

(Bloomberg) — A European stock trade that deployed the use of ETF products as a means of hedging currency exposure is one that enamored global investors throughout 2015 and drew more money than practically anything else in equities is blowing up in people’s faces.

As the moves in the the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ) show, the strategy of going long the region’s shares while hedging to mute the euro’s swings is unraveling. The exchange- traded fund has plunged a record 14 percent in December, erasing annual gains that swelled to as much as 23 percent in April and were still above 18 percent in July. Hit by withdrawals, its market value has fallen to $17 billion from more than $22 billion as recently as August.

Investors are pulling money from the fund like never before after Mario Draghi’s increase in European Central Bank stimulus failed to live up to expectations, triggering a decline in the region’s stocks and a strengthening of its currency.

“A lot of investors have been protecting themselves against a weaker euro, aiming for European equity returns which have been very strong this year as long as you hedged the euro,” said Ewout van Schaick, head of multi-asset portfolios at NN Investment Partners in The Hague. His firm oversees 180 billion euros ($198 billion). “That story seems to be over after the recent central bank actions. Investors are positive on European equities but are less sure it has to be on a hedged basis.”

The fund’s popularity grew earlier this year, when its hedge became of paramount importance as the ECB started its bond-buying program, triggering a weakening of the euro to levels not seen since 2003 and a 22 percent surge in the region’s stocks. In the first four months of the year, traders poured $13 billion in the ETF, making it the favorite vehicle to bet on European equities.

NYSE FEZ
Euro Stoxx 50 Index NYSE:FEZ

FEZ Fizzles. Fast forward to December, and things don’t look as good. The Euro Stoxx 50 Index, whose ETF tracker is NYSE:FEZ is down 7.1 percent through yesterday’s close, heading for its worst ending to a year since 2002, while the euro is set for its biggest monthly advance since April against the dollar.

Forecasters don’t see the currency moving much from now. It’ll weaken to $1.05 and stay at that level for the first three quarters of next year, before starting to rebound, according to projections. It’s hovered around $1.09 for most of December.

That doesn’t mean the consensus is turning bearish on European equities. Even without a significant weakening of the currency, strategists expect euro-area equities to climb another 12 percent by the end of next year, aided by a recovering economy, ECB stimulus and low valuations. The Euro Stoxx 50 rose 1.2 percent at 11:47 a.m. in London. At 14.2 times estimated earnings, companies on the gauge are cheaper than those on the Standard & Poor’s 500 Index or MSCI All-Country World Index.

“We still believe in European equities,” Van Schaick said. “The European economic recovery is in the earlier stage, so all the lights are green for Europe. They’re going to do a lot better than U.S. equities next year.”

Sell This Rumor: Hedge Funds Exploit ETF Ecosystem

The battle between business news pontificaters across the 4th estate is in full season, as evidenced by a smart article yesterday by Bloomberg LP’s Eric Balchunas and suggests that MarketsMuse curators are apparently not the only topic experts who noticed and took aim at a recent WSJ article that proclaimed savvy hedge fund types are increasingly exploiting exchange-traded funds by arbitraging price anomalies between the underlying constituents and the ETF cash product that occur in volatile moments.

That original WSJ article, “Traders Seek Ways to benefit from ETF woes …At the Expense of Investors” was misleading, and as noted by MarketsMuse Sept 30 op-ed reply to the WSJ piece, one long time ETF expert asserted that WSJ’s conclusions was “much ado about nothing.” Bloomberg’s Balchunas has since reached a similar conclusion; below are extracted observations from his Oct 12 column..

Hedge funds may need to get back to the drawing board if they’re planning to turn around their performance struggles by capitalizing on “shortcomings in the ETFs’ structure” via some unusual trade ideas, as highlighted in this recent Wall Street Journal article. Most funds do nothing of the sort.

Eric Balchunas, Bloomberg LP
Eric Balchunas Bloomberg LP

The vast majority of ETF usage by hedge funds is very boring. They love to short ETFs to get their hedge on and isolate some kind of risk. For example, they may short the Health Care Select Sector SPDR ETF (XLV) and then make a bet on one of the health-care stocks in the basket in order to quarantine a single security bet. Hedge funds have about $116 billion worth of ETF shares shorted, compared with only $34 billion in long positions, according to data compiled by Goldman Sachs last year.

The $34 billion in long positions is them using ETFs like everyone else — as a way to get quick and convenient exposure to a particular market. For example, the world’s largest hedge fund, Bridgewater Associates, has a $4 billion position in the Vanguard FTSE Emerging Markets ETF (VWO), which it has held for six years now.  There’s also Paulson & Co.’s famous $1 billion position in SPDR Gold Trust (GLD), which it has been holding for almost seven years. Like anyone else, they like the cheap exposure and liquidity VWO and GLD serve up.

With that context in place, yes, there are a tiny minority of hedge funds that engage in some complex trades like the ones highlighted in the article. But each trade comes with at least one big problem.

Before anyone tries any of these at home, it’s important to deconstruct them.

Trade #1: Robbing Grandma

How it works: During a major selloff, try and scoop up shares at discounted prices put in by small investors using market orders.

The problem: It’s super rare. Aug. 24, which saw hundreds of ETFs trade at sharp discounts amid a major selloff, was basically an anomaly. At best, a day like that happens once every two years. Thus, to capitalize on discounts of the 20-30 percent variety is like standing on a beach waiting for a hurricane to hit. And you won’t be the only one, so you may wait two years only to find you can’t get your order filled on the day the big one hits. In addition, no large institutional investors are putting in market orders. So this low-hanging fruit is sell orders for tiny amounts put in by unknowing small investors. Essentially this is the white-collar equivalent of robbing Grandma for some loose change in her purse.

Moreover, Aug. 24 may never happen again, at least the way it unfolded. ETF issuers are working with the exchanges, the regulators, and the market makers — and even making significant recommendations — to make sure those kinds of small investors aren’t exposed again like that.

It should be noted, though, that arbitrage between the ETF price and the value of the holdings happens day in and day out with ETFs — that’s how ETFs work. They rely on a network of market makers and authorized participants to arbitrage away the discrepancy between the ETF’s underlyings and its net asset value (NAV).

Trade #2: The Double Short

To continue reading the straight scoop from Bloomberg columnist Eric Balchunas, click here

How Savvy Hedge Funds Exploit ETF Products-Supposedly

While equities markets have zig-zagged since late summer with lots of volatility,  leading to pretty much no change in major indices since late August, news media outlets have put their cross hairs on the ETF industry, which has been battered with criticism consequent to out-0f-context pricing that has riddled opening bell markets during recent spikes in volatility.  CNBC pundits have invited an assortment of geniuses to explain, defend or attack ETFs for days, including 30 minutes dedicated to the topic mid-day yesterday.  The industry print publications have been repurposing each other’s copy with similar themes for days, and the SEC and other alphabet agencies are purportedly ‘investigating’ the ETF industry as a consequence of the recent disruptions.

For equities market experts who are fluent in exchange-traded funds, which are nothing more placeholders for bespoke basket trading strategies–you know that the notion of disruptions in pricing of the cash product aka the ETF could easily happen whenever there is a dislocation in the underlying constituents. Its a caveat emptor type of product. But, somehow, this simple concept has been lost on everyone, except of course by ‘savvy hedge fund managers’..and what a surprise, one HF name now being mentioned for exploiting ETF products is none other than Steve Cohen.

Here’s an excerpt from today’s WSJ “Traders Seek Ways to Benefit From ETFs’ Woes…In some cases, gains come at expense of individual investors”….–which is arguably best suited for college freshman taking elementary classes. According to one trader interviewed by the MarketsMuse Curator, “If there is any SEC-certified RIA or any institutional investor who doesn’t understand this product and the related nuances [and believes the WSJ article was informative], your license should be stripped.”

Here’s an excerpt from today’s WSJ story by Rob Copeland and Bradley Hope Continue reading

Robo Adviser Beat:Betterment Claims Better ETF Construct for 401ks

MarketsMuse curators note that “there is always a better way, until its not better. ..”But that isn’t stopping Betterment LLC, the startup robo-adviser that claims to offer a solution for investors who seek an automated approach to stuff ETFs into their401k portfolios.

Betterment, a leading robo-adviser, announced last week that it will launch a 401(k) platform for employers starting early next year. Portfolios will be made up of exchange-traded funds.

Jon Stein, Bettterment CEO
Jon Stein, Bettterment CEO

According to Betterment CEO Jon Stein.. “Current 401(k) offerings—and we have examined them all—have poor user experiences, high costs, and a clear lack of advice. Not anymore. Betterment for Business will bring our smarter technology to the workplace and the millions of Americans who badly need it to meet their retirement needs. “It’s time that all Americans have low-cost, unconflicted advice and smarter technology for retirement planning.”

Betterment says it currently has 100,000 retail customers and $2.6 billion in assets under management in its diversified mix of exchange-traded funds.

Fast-growing ETFs remain a tiny part of the 401(k) market. Anne Tergesen at The Wall Street Journal notes that two key benefits of owning ETFs — intraday trading and tax-efficiency — are sound much less exciting in reference to 401(k)s:

“A couple of ETFs’ biggest selling points don’t give them an edge in the 401(k) market. ETFs trade all day long like stocks, but that typically isn’t a feature that employers want to offer in retirement plans. Employers want employees “to take a long-term perspective—not to be day trading,” Ms. Lucas said.  “ETFs are also tax-efficient, but that doesn’t matter in tax-sheltered retirement plans,” said Brooks Herman, head of data and research at BrightScope.”

In offering an ETF-only menu for its 401(k), Betterment joins Charles Schwab Corp. , which last year launched an all-ETF version of its Index Advantage 401(k) platform. Other companies that offer ETFs within 401(k) plans include Vanguard Group and Capital One Financial Corp.’s ShareBuilder 401(k).

For the full story from the WSJ, please click here

Rule 48, ETF Dislocation: BATS CEO Says “No Humans Needed”

When ETFs were first launched in 1993, the ‘framers’ might not have fully appreciated what would happen to the respective ETF cash index in the event of a lopsided market opening when the underlying constituents had not yet opened for trading, despite the easy recall of October 1987..

Since that time, market structure experts and the cast of exchange characters regulated by the SEC have introduced a litany of steps, including NYSE’s Rule 48 that are designed to serve as circuit breakers to bring calm to the chaos caused by out-sized volatility, particularly during market openings. According to observations in the wake of the most recent market turmoil, when ETF market-makers stepped back and provided wide-as-a-truck pricing because constituent issues had yet to open, the CEO of BATS Global Markets, the electronic trading platform that has grown from the size of mouse to being one of the bid kids on the block, sent a signal to the media that led many, including MarketsMuse editors, to infer that he believes that humans are no longer relevant in the new age of Wall Street, computer horsepower and smart algorithms.

As noted by the WSJ in its Sep 1 story by Bradley Hope , “…in a strongly worded rebuke to its rival and NYSE operator Intercontinental Exchange on Tuesday, BATS Chief Executive Chris Concannon said that NYSE Group’s process for opening trading on stocks listed at the exchange was “broken” and that major changes needed to be made to protect investors from future problems. “No one on the planet operates that way, and no one should operate that way,” he said in an interview, adding that he sees “very limited value” in the use of humans on the trading floor

Some traditional market experts have since quietly suggested that Concannon “could have bets in his belfry if he believes that computers should be taken out of the equation.”

NYSE officials and floor brokers have argued for years that they serve a crucial role providing slower trading within today’s high-speed, electronic markets.

“The debate is about whether we need a slower market structure or a faster market structure on days with large systemic volatility,” said David Weisberger, managing director at market-analytics firm RegOne Solutions. The slower version is driven largely by people, whereas the faster one is controlled by computers and trading algorithms, he added.

The NYSE spokeswoman defended the exchange’s approach by contrasting it with a notable failure that BATS experienced itself with its own initial public offering.

Here’s the two points of Rule 48 and what the debate is based on.

  • IN A NORMAL MARKET: Market makers indicate where a stock might open. That helps investors modify buy and sell orders.
  • IN A VOLATILE MARKET: Market makers don’t have to indicate where a stock might open. That should make it easier for stocks to open quickly. But investors have less information about the market prices for securities.

Ted Weisberg, a longtime floor trader and founder of floor brokerage Seaport Securities Corp., said invoking Rule 48 can speed up the opening of stocks but leads to less transparency.

“When you invoke Rule 48, you’ve opted for speed over price discovery and speed over transparency,” he said. “‘What’s in the public’s best interest is transparency and time to react.”

An NYSE spokeswoman said: “Rule 48 allows us to expedite the opening of stocks on volatile days while maintaining the hallmark transparency that we are known for.”

BATS is accustomed to Donald Trump-style brashness  In prior MarketsMuse coverage ,they are strong advocates of “pay-to-play” kickbacks that provide rebates in exchange for orders sent to their electronic venue as opposed to sending to competing electronic trading venues. Here’s an excerpt from that story: Continue reading

SunGard ETF Pricing Glitch Update: BNY Has $220bil Headache

As reported earlier this week by MarketsMuse, a “computer glitch” suffered by market data vendor Sungard Systems has left custodian BNY Mellon still scrambling to price Net Asset Value (NAV) for nearly 10% of exchange-traded funds held by customers. Late Wednesday, BNY said 20 mutual fund companies and 26 ETF providers have experienced “some pricing problems.” According to sources, the snafu has impacted $220bil worth of assets.

According to Bloomberg news, “A technology breakdown at Bank of New York Mellon Corp., leaving it unable to price more than 10 percent of U.S. exchange-traded funds and some mutual funds, may be causing investors to overpay for them.

BNY Mellon said Thursday in a statement that it’s working “round-the-clock” to fix a technology issue at vendor SunGard Data Systems Inc. The snafu has prevented the bank from issuing net asset values, the equivalent of closing prices, for the funds. The bank said 20 mutual fund companies and 26 ETF providers have experienced some pricing problems.

The bank said customers have been able to continue trading the affected funds. But in the absence of accurate prices, some investors may have paid more than they should when purchasing them, said Ben Johnson, director of global ETF research at Morningstar Inc.

Johnson said that figuring out how to compensate investors hurt by the system failure will be a headache. He said mutual fund investors are likely to suffer more damage, because net asset values play a more critical role for funds than they do for ETFs.

U.S. Securities and Exchange Commission rules do not specifically address this matter, said an SEC official who asked not to be named. The bank’s liability may depend on the wording of its contractual agreements with the funds rather than securities law, the official said.

Kevin Heine, an BNY Mellon spokesman, declined to comment on the matter.

SunGard Apology

SunGard, a financial software company with annual revenue of $2.8 billion, said in a statement Thursday that the incident was not caused by any external or unauthorized system access, and wasn’t related to the market turmoil this week. The issue was caused by an operating system change performed by SunGard on Saturday, Aug. 22.

“We at SunGard apologize to BNY Mellon for the adverse impact this unfortunate incident has had on its operations and clients,” SunGard Chief Executive Officer Russ Fradin said…”

For the full story from Bloomberg, please click here

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State Street Loses Lead in ETFs; Moves On to Hedge Funds

MarketsMuse updates that State Street Corp., which lost its lead in exchange-traded funds after being a pioneer in the business more than two decades ago, is now betting on hedge funds.

The firm is expanding hedge funds and alternative investment strategies that can be offered to individual investors, Ronald O’Hanley, who in April replaced Scott Powers as head of the $2.45 trillion State Street Global Advisors, said in an interview from Boston. The money-management unit this month named Michael Ho to a newly-created role of chief investment officer for alternatives.

Ho, who heads active emerging market stock investing for State Street Corp.’s asset-management arm, will lead the unit’s expansion into these alternatives.

Last month, State Street Global Advisors named Ho to the newly created position of chief investment officer for alternatives, confirmed Brendan Paul, a spokesman for the Boston-based bank.

State Street is seeking to expand its asset management business as its active strategies — which command higher fees — have shrunk, and passive strategies such as ETFs have lost ground to BlackRock Inc. and Vanguard Group.