Tag Archives: exchange-traded funds

bats-europe-direct-buyside-access

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.

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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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virtu says no to corporate bond etf market-making

Virtu Says NO to Corporate Bond ETF Market-Making

Virtu Says NO to Corporate Bond ETF risk-taking; Top Market-Maker Opines “Unable to Hedge ETF Constituents Due To Limited Liqudity”

During the better part of three years, MarketsMuse Fixed Income curators have often pointed to concerns expressed by market professionals who argue that the unfettered growth of corporate bond ETFs are masking the inevitable likelihood that once interest rates begin to rise, buy side fund managers fearful of mark-downs in their corporate bond positions will push the ‘sell button’ en masse to limit the P&L hit. Those in the camp expressing such concerns, which includes Virtu Financial, one of the most successful electronic market-makers in the industry, believe that such a mass exodus will wreak havoc on the now $8.4 trillion US corporate bond ecosystem* (*data according to Sifma), where new issuance for 2016 has just surpassed 1 Trillion dollars, and is a marketplace that since 2011 alone, has grown nearly 50% in terms of notional value and number of outstanding issues.

Per one senior market risk expert familiar with the thinking at Virtu, “Their’s isn’t simply a view typically attributed to academics, who have increasingly warned and have been equally derided by ETF lobbyists for suggesting a secondary market meltdown in corporate bond ETF products is inevitable when rates rise. Instead, Virtu has concluded that for those who make a business of ‘taking the other side’ of corporate bond exchange-traded funds, whether investment grade (e.g $LQD) or high yield themed (e.g $HYG), will find themselves playing a game of musical chairs, but there will be no chairs available for anyone when the music stops and traders will find themselves unable to find any liquidity in the respective ETF underlying constituents.”

Below opening excerpt from mainstream media outlet Bloomberg LP and reported by Bloomberg reporter Annie Massa:

One of the world’s largest electronic market makers won’t touch increasingly popular corporate bond ETF products because the underlying securities are too hard to trade.

Although New York-based Virtu Financial Inc. buys and sells everything from stocks to government bonds and futures on more than 235 exchanges around the world, it shuns products linked to corporate bonds like the $15 billion iShares iBoxx $ High Yield Corporate Bond ETF. The reason, according to Chief Executive Officer Doug Cifu, is that it’s too hard for Virtu to precisely hedge the trades.

“It’s definitely concerning you don’t have full and unfettered access to the underlying,” Cifu said, speaking at a Security Traders Association conference in Washington on Thursday. “That’s troubling.”

During the fourth quarter of 2015, TABB Group interviewed key US corporate bond market participants across buy-side, sell-side and specialized trade service providers.Across all segments covered within the survey, participants’ responses reflected dim expectations for liquidity available in the US corporate bond market for 2016. Apart from the threat of a “large scale macro crisis,” the most serious threat that participants identified was the ongoing decline in immediacy (balance sheet) provided by dealers.

Worldwide assets in bond ETFs have surged in recent years, jumping fivefold since January 2010 to about $600 billion, according to data compiled by Bloomberg. About 88 million shares of fixed-income ETFs have traded daily in the U.S. during the past 30 days, according to data compiled by Bloomberg.

Other market makers including Citadel Securities and Susquehanna do trade the ETFs, but Virtu’s absence is notable given how dominant the company is in other areas. Cifu said Virtu does trade ETFs containing U.S. Treasuries, including the ProShares UltraShort 20+ Year Treasury.

To read a Bloomberg Markets profile of Virtu, click here.

Virtu’s strategy involves arbitraging price difference in related assets, quickly entering and exiting the positions. With fixed-income ETFs, the company is concerned it can’t get access to the related bonds fast enough. Market makers with longer trading time frames may be less reluctant. Virtu’s line of thinking echoes worries elsewhere in the industry. Shares of the funds are often easier to trade than their underlying bonds, potentially posing a risk if there’s a sudden rush for the exit.

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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-etf-issuer-acquisition-marketsmuse

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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oleary-shark-tank-etf-marketsmuse

O’Leary of Shark Tank Brands Bigger Pool of ETF Products

The summer interns at MarketsMuse had already voted “Shark Tank” as their favorite TV show,  so it was no surprise that our senior curators took their cue to advance the latest news from Kevin O’Leary, the celeb entrepreneur and more recently, an ETF aficionado who has extended his brand to the world of exchange-traded fund (ETF) products under the O’Shares Investment umbrella.

(Bloomberg) — Kevin O’Leary is out to carve a niche for himself in the world of exchange-traded funds.

The chairman of O’Shares Investments and Shark Tank personality has filed a prospectus with the Securities and Exchange Commission to launch 17 ETFs. All the proposed offerings have “quality” in the name and would employ a passive investing approach. The investable universe of these funds includes emerging-market equities, small-cap U.S. stocks, preferred shares, and even corporate credit.

“It’s rare for an indie shop like this to put this many funds on one filing,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence.

O’Leary’s celebrity status and the application of smart-beta strategies to fixed income could help the Canadian businessman differentiate himself and attract assets in what’s becoming a crowded ETF space, with roughly 60 issuers in the U.S. The “quality” designation suggests O’Leary’s ETFs will put a priority on conservative factors, which are in vogue as the bull market enters its eighth year.

O’Shares’ most popular current offering, the FTSE U.S. Quality Dividend ETF (NYSE ARCA: OUSA), has $240.5-million in assets and has outperformed the S&P 500 so far this year:

Details on expense ratios or fees for O’Shares‘ proposed ETFs weren’t included in the preliminary prospectus. The FTSE U.S. Quality Dividend ETF has an expense ratio of 0.48 percent, which is roughly in line with that of other smart beta offerings.

Earlier this year, O’Leary indicated that he was considering a run for the leadership of the Conservative Party of Canada after former Prime Minister Stephen Harper’s Tories lost the 2015 federal election to the Liberals, led by Justin Trudeau.

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Deutsche Börse Gets Into ETF Block Trades

(MarketsMedia)–European exchange-traded fund (ETF) issuers have welcomed a new service from Deutsche Börse which aims to make it easier to trade large ETF orders on the German exchange.

Deutsche Börse has launched Xetra Quote Request which allows investors to send quote requests for large orders to all registered market makers of a selected ETF, rather than having to negotiate ETF transactions bilaterally over-the-counter or through request-for-quote systems.

The market makers respond by updating their quotes in the Xetra order book, Deutsche Börse’s electronic trading platform. Investors can generally receive a response within 120 seconds of the submission of a quote request although less liquid funds may require more time than highly liquid products according to the exchange.

The process is designed to achieve a high degree of automation with straight-through processing, clearing and settlement, which reduces operational and counterparty risks, while ensuring compliance with best execution requirements for large orders.

Deutsche Börse said in a statement: “Investors therefore benefit from a potential price improvement over execution against a single market maker quote, and ensure best execution by simultaneously interacting with the full liquidity available in the order book.”

Jürgen Blumberg, head of European capital markets at Source, told Markets Media that the European ETF issuer very much liked the Deutsche Börse initiative. “In Europe approximately 70% of ETF volume is traded over-the-counter and liquidity is invisible. If there is more visibility then ETFs will be even more widely used,” he added.

Lansing agreed that the European market will benefit from more on-exchange trading.

“A number of ETP issuers (including us) have long recommended the creation of a consolidated tape (a comprehensive record of both on-exchange and OTC trades),” Lansing added. “Given that that is still in process, more trading on-exchange will go a long way to promoting greater liquidity, price discovery and transparency.”

MiFID II is due to introduce mandatory reporting for ETFs but the new regulations covering European financial markets have been delayed by one year to 2018.

For the full article from MarketsMedia, please click here

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A New Social Media ETF :$BUZ

Not to be confused with yet another social media ETF comprised of social media companies, the latest flavor in the creative world of exchange-traded funds is courtesy of ALPS Advisors and Sprott Asset Management; an ETF that tracks the performance of the BUZZ Social Media Insights Index, which in turn, identifies U.S. companies that rank highest in terms of  ‘positive public perception’ as measured by ‘the buzz’ on social media platforms.

The ticker symbol at NYSEArca is $BUZ, and while our very own MarketsMuse senior editor suggested  a better ticker symbol would be “BUZZ”,  that ticker is rumored to have been reserved by former NYMEX Chairman Richard Shaeffer in connection with his backing of Americanex Corp, an upstart electronic exchange platform for cannabis growers and distributors, and run by former Tullett Prebon FX broker Steve Janjic.

Still don’t get the value proposition of buying an ETF comprised of companies that inspire positive social media generated vibes via their brands? Especially when a single snarkly tweet from a much-followed celeb or political candidate (e.g. Trump) can cause a company’s share price to plunge in a nanosecond? MarketsMuse curators canvassed an assortment marcom experts who also understand the nuances of investing and the senior resident at   The JLC Group distilled the description of the ALPS ETF with this comment, “..the presumption presumably is that companies having a high rank insofar as perception (aka

canadian-exchanges-ETF

Canadian Exchanges Face-Off Over ETF Listings

Last week, Canadian upstart exchange Aequitas NEO announced its first ETF listing, and in response to that PR promotion, Toronto Stock Exchange (TSX), a subsidiary of TMX Group fired back with a slapshot, thanks to TD Asset Management (TDAM) listing and launching six new ETFs.

(TradersMagazine) Executives from TD Asset Management opened trading of its new exchange traded fund business at the Toronto Stock Exchange. Last week, TDAM’s six new passive ETFs began trading on TSX, including products designed to track the performance of Canadian fixed income markets as well as Canadian, U.S. and international equities.

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Lou Eccleston, CEO TMX Group (photo via Bloomberg)

“TSX is proud to welcome TD Asset Management ETFs to our Exchange. TDAM has been a great sponsor of the industry and our firm for many years,” said Nick Thadaney, president & CEO, Global Equity Capital Markets, TMX Group.

He added, “We have a rich history in supporting the successful growth of the ETF marketplace and we remain committed to serving this segment into the future. ETFs have become a vital part of Canada’s markets and a great example of the dynamic and diverse products we offer to investors.”

To celebrate the listing on TSX, Tim Wiggan, CEO, TDAM, joined Thadaney to open trading this morning.

As of February 29, 2016, there were 384 ETFs and exchange traded notes listed on TSX with a combined market capitalization of over $98 billion.

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ETF Momentum for Canada Exchange Aequitas NEO

(TradersMagazine) The TSX is getting a run for its money. This week the Aequitas NEO Exchange (which only launched one year ago) signed its first listed security. Invesco Canada’s PowerShares DWA Global Momentum Index ETF, trading under the ticker DWG, took that honor and is also the first ETF listed on a Canadian exchange other than the TSX.

In a press release issued by the exchange, the company stated “DWG began trading on the NEO Exchange on Tuesday, March 22, 2016. The first week of trading was flawless and allowed market participants to confirm readiness. The quality of liquidity provision during these first days of trading was particularly notable.”

“Our first momentum-based ETF has been trading for over a week and we have been pleased with the early level of liquidity and investor interest,” said Chris Doll, Vice-President, Product & Business Strategy, PowerShares Canada. “We are very proud to celebrate this important milestone with the NEO Exchange. The idea of increasing competition in Canada makes perfect business sense to us. We are always looking for ways to be more efficient with our PowerShares ETF listings and we are strong believers in competition driving efficiency and innovation. As a shareholder, we have closely monitored the growth of the NEO Exchange since its launch, and with the development of our Global Momentum Index ETF, we determined the time was right to list on this new exchange.

About Aequitas NEO Exchange

The NEO Exchange is a new Canadian stock exchange using a bold new blueprint that puts investors, businesses looking to raise capital and dealers first. Launched in March 2015, the NEO Exchange currently offers an innovative trading venue and a value added listing venue for companies and investment products. Aequitas NEO Exchange Inc. is a wholly owned subsidiary of Aequitas Innovations Inc., a company founded by a diverse group of prominent investors representative of all Canadian capital market stakeholders. For more information, please visit www.aequitasneoexchange.com

 

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BATS Global is Batty About ETFs-Buys ETF.com

While many people are “koo-koo for Cocoa Puffs”, BATS Global is batty about ETFs. On the heels of launching a dedicated electronic exchange platform for ETF products dubbed BATS Marketplace,  BATS Global Markets announced yesterday that is even more batty about ETFs and to prove it, the exchange operator is acquiring the ETF industry’s leading provider of exchange-traded fund news, data and analytics, ETF.com.

“This is a brand burnishing 201 case study for an otherwise staid electronic exchange industry as operators seek innovative, content-specific applications to distinguish themselves

(MarketWatch.com) Exchange operator BATS Global Markets said Tuesday it would buy ETF.com, a provider of data about the market for exchange-traded funds. BATS CEO Chris Concannon said the purchase “underscores [BATS’s] commitment to the ETF industry and our focus on providing unique, value-added content for issuers, brokers, financial advisors, market professionals and investors.”

ETF.com’s data will add to BATS’s existing proprietary market data and analytics offerings, according to a news release. BATS operates four stock exchanges in the U.S., which represent the largest venue for trading ETFs in the country when taken together, says BATS. Financial terms were not disclosed. The deal is set to close on April 1, according to the statement. The acquisition comes as Lenexa, Kansas-based BATS is trying to grow its ETFs listing platform. The exchange operator last year launched BATS Marketplace, offering to pay ETF providers as much as $400,000 to list on its exchange.

BATS listed 30 new ETFs on its US market last year─11 in December alone, more than any other US market, officials say─bringing its total ETF listings to 56, says the deal will expand the proprietary market data and analytics that BATS offers to support market participants in making “educated trading nad investment decisions.” ETF.com will become an independent media subsidiary of BATS Global.

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Eaton Vance Launches Non-Transparent ETF aka “ETMF”

Eaton Vance Corp. today launched the first-ever non-transparent, actively-managed ETFs. Their new creation is called an exchange-traded managed fund (ETMF) and goes under the brand name NextShares.

Quite a coup considering last week’s MarketsMuse story “SEC Chair White Says I’ve Got a Dream” [for the SEC to actually read offering prospectus of complex ETFs before rubber-stamping their flotation in the market]. For those confused about what the heck a non-transparent, actively-managed exchange-traded fund is (and whether it is an appropriate investment vehicle for you/your clients), keeping reading..

ETMF-NextShares(Boston Globe)-Eaton Vance Corp.’s new experiment in exchange-traded funds — blending active stock-picking with the popular ETF structure of trading on a stock exchange — launched Friday morning.

The Boston-based investment firm’s new fund, called Eaton Vance Stock NextShares, a diversified stock portfolio, listed and begin trading on the Nasdaq Stock Market. Individuals, financial advisers and institutions can start trading in the shares Monday.

It’s been a long road for Eaton Vance to get regulatory approvals and bring this product to market in the crowded, $2 trillion ETF arena dominated by inexpensive, passive portfolios that mimic indexes like the Standard & Poor’s 500.

What is a non-transparent ETF??? Click Here To Find Out

And instead of launching a planned roster of new active ETFs, Eaton Vance is testing this one first, and aims to follow with others.

“The company was hoping to have more of a suite to offer on the first day or in the early innings,’’ said Stephen Tu, a senior analyst with Moody’s Analytics in New York.

The market may want to see how this ETF trades. It’s different from passive funds in that its holdings won’t be as transparent; investors won’t get to know what the fund owns every day.

And in order to get the full benefits of lower costs generally associated with ETFs, there have to be significant assets in the fund to make it easy and inexpensive to buy and sell.

For some, the NextShares concept is a kind of hail-Mary pass for the traditional, actively managed fund industry. The question is whether investors will embrace active management in this new package.

“The appetite in the marketplace right now is going towards vanilla ice cream,’’ Tu said, meaning passive ETFs. Likening traditional, active mutual funds to strawberry ice cream, he said, “whether it’s in a cone or a cup, you may not buy that strawberry ice cream.”

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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

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SEC Aims To Ban Geared ETFs

The US SEC apparently has its cross-hairs on so-called ‘geared ETFs,’  those high-testosterone, levered instruments that incorporate derivatives so as to deliver an advertised 2x or 3x return for certain strategies versus a typical 1:1 correlation provided by plain vanilla exchange-traded funds.  The SEC proposal would effectively ban the use of those products altogether.

As reported by Ari Weinberg in his most recent column in Pensions & Investments,  SEC staffers are holding further rounds of reviews of proposed rule changes that could effectively eliminate triple-leveraged and triple-inverse ETFs, which totaled 66 funds and $11.3 billion in assets under management as of Jan. 15, according to research firm XTF. Excluding exchange-traded notes, which are not subject to the Investment Company Act, the entire leveraged and inverse ETF universe includes 195 funds and $30.1 billion in assets.

This is not to suggest that  ‘inverse return’ exchange-traded funds are bad (even if many are actually completely unsuitable for most investors),  it’s just that nobody at the SEC seems to understand how they work, despite the fact these products need first be approved by the SEC before they can be issued, and despite the fact the SEC has given its green light to the these derivative-powered exchange-traded notes aka ETNs since they were first conceived and popularized  nearly 15 years ago.  According to one senior investment manager executive  overseeing nearly $10bil AUM and who asked not to be identified in this article, “..The proposed rules being discussed now simply proves that the SEC need not ever understand a financial product before they rubber-stamp the issuance of a financial instrument that would fall under SEC oversight.” He further added, “Its hard to say which is more broken, the SEC or products they allow to be sold to institutional and retail investors.”

“The SEC is responding to a combination of concerns, some of which are well founded and some of which are less well founded. There’s a belief that ETFs create risk because of asset class exposures, high trading volumes and market structure issues,” says Edward Baer, counsel at Ropes & Gray in San Francisco, who recently served as chief legal officer for BlackRock (BLK) Inc. (BLK)’s iShares business.

Geared ETFs, offered separately by ProShares and Direxion Investments, are designed to track two or three times the daily return (or inverse) of an underlying index. Awareness of the products peaked during the volatile days of the financial crisis, but both FINRA and the SEC have repeatedly voiced concerns that the products are misunderstood by many investors or used improperly.

As noted in the P&I story by Ari Weinberg..

In turn, both the SEC and FINRA have stated that regulatory examinations in 2016 will focus on the knock-on effects and risks to authorized participants in the ETF ecosystem. This network of investment banks and trading firms greases the wheels of ETF trading by creating or redeeming shares in the primary market and buying or selling in the secondary market. Their trading is motivated by the profit potential in arbitraging away price discrepancies in the ETF share price and the underlying assets.

“AP activities may … result in pressure on the financial integrity of broker-dealers in some conditions and this, in turn, could impair the liquidity provision function the broker-dealer plays when acting as an AP,” FINRA wrote in its annual examination priorities letter.

Similarly, the SEC’s office of compliance inspections and examinations said that it would focus on ETF compliance with their exemptive relief, as well as sales, trading, and disclosures involving ETFs.

For the full story from P&I, click here

 

junk-bond-etf-liquidity

Junk Bond ETFs-The Liquidity Debate Goes to SEC

MarketsMuse ETF and Fixed Income curators have frequently spotlighted the ongoing debates as to whether corporate bond ETFs, and in particular, junk bond-specific exchange-traded-funds pose special risks. Some argue that a liquidity crisis could unravel the high yield bond sector if/when institutional investors decide that risk of recession continues to ratchet higher, leading all of those investors to run for the exit at the same time, and in turn, causing a reverberation across the ETF market. The counter side to that thesis is that corporate bond ETFs (NYSE:HYG among them) are insulated from the risk of a catastrophe that might envelope the underlying components (the actual bonds themselves). One thing that is certain is that the US SEC is not certain, and they’ve raised the volume on this topic.

Adding light to this topic is WSJ columnist Ari Weinberg, someone who is arguably one of the best educated members of the 4th Estate when it comes to ETFs, and Monday night column deserves our kudos and sharing select extracts…Roll the tape..

junk-bond-etf-liquidity-crisisMost investors in mutual funds and exchange-traded funds probably don’t worry much about liquidity. After all, fund shares can be bought and sold easily anytime online, and trades are completed in one to three business days.

But there is another layer of trading—the trading the funds themselves do when a wave of selling by investors requires the funds to sell some of their assets—that has the Securities and Exchange Commission worried about liquidity. And the commission wants investors to be more aware of the risks it sees.

The issue is particularly pertinent for the fixed-income fund market, because assets that some of those funds hold are very thinly traded. Here’s a look at what’s involved.

Deciding between the two isn’t always straightforward. Here’s help clarifying the differences and similarities.

The SEC’s concern is that some mutual funds and ETFs might hold too many securities that aren’t easy to sell quickly. As a result, the funds might not always be able to adjust their holdings without “materially affecting” the funds’ net asset value per share, the commission said in its September announcement of proposed new liquidity-risk management rules. In other words, selling a substantial amount of illiquid securities quickly could drive down their price, resulting in a big loss for a fund, lowering its value.

Among other things, the proposed rules would require funds to categorize the liquidity risk of their holdings according to how many days it would take to sell the assets without greatly affecting their market price, and disclose those risk assessments to investors. The SEC also proposed to strengthen and clarify an existing guideline that no more than 15% of a fund’s assets should be held in securities that would take more than seven days to convert to cash.

Several ETF issuers, as well as the Investment Company Institute, a fund industry trade group, have said in comment letters that the SEC’s proposals aren’t relevant to most ETFs, because the funds are structured differently from mutual funds.

Mutual-fund investors buy and sell their shares directly from or to the fund. So mutual funds regularly need to sell assets on the open market to pay investors who are redeeming their shares. But ETF shares are traded among investors, not between investors and the fund. So most ETFs usually don’t have to sell assets when investors sell their shares, because the shares are being bought by other investors, not being redeemed by the fund.

ETF shares are only created or redeemed, and the underlying assets bought or sold, when doing so is necessary to keep the market price in line with the net asset value of the fund’s holdings. Those transactions are done between the funds and financial institutions called authorized participants, or APs, which often also serve as market makers in the ETFs and other securities.

Here is how it works in most cases: If heavy selling is driving an ETF’s market price below the fund’s net asset value, a market maker, acting through an AP or acting as an AP itself, will buy up shares and deliver them to the fund in the form of a so-called creation unit—taking them off the market—in return for an equal value of the underlying assets held by the fund. It’s then up to the trading firm to decide if it wants to hold those assets or sell them.

The argument ETF issuers are making to the SEC is essentially that this process insulates ETF investors from the dangers of a fund having to sell illiquid securities on the open market.

The opposing argument, made by the SEC and those who favor the proposed new rules, is that there is a risk that the AP might not be willing to take on assets that are very hard to sell quickly, throwing a wrench into the whole process of keeping the fund’s net asset value in line with its share price. That would be reflected in a widening of the bid-ask spread for the ETF—the difference between the price investors can get for selling shares and the higher price they would have to pay to buy the shares.

The concern that this could happen to a fixed-income ETF is based in part on changes in recent years in the fixed-income markets. Financial institutions in general are more averse to the liquidity risk that some debt securities pose, in part because of increased regulation governing the institutions’ risk exposure. Investment banks, for instance, hold 80% less corporate bond inventory than a decade ago.

Ultimately, according to many traders and market participants, concerns around ETFs and fixed-income holdings will only be mitigated when there is more transparency in the market, as more securities are quoted and traded electronically. Currently, only about 10% to 25% of the secondary trading in corporate bonds—depending on the amount of each bond in the market and the issuer’s credit quality—is electronic. The rest is done via online messaging and phone calls.

Continue reading Ari Weinberg’s dissertation directly via the WSJ

 

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.

nyse-etf-marketshare-slipping

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