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bond-etf-trading

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

Bitcoin ETFs: BIT Could Be “Balderdash” Says Sell-Side Seer

MarketsMuse.com ETF snapshot takes another bite into the topic of Bitcoin, the dominant digital currency that continues to gain traction with leading brokerdealers and many, [but not all] from across the ETF universe, despite the currency’s 74 percent decline since November 2013. Below is excerpted from 07 April coverage courtesy of NewsMax.com

Big-time traders and investors are starting to participate in the bitcoin market, The Wall Street Journal reports. The list of participants includes Citadel Securities, KCG Holdings and Wedbush Securities. Citadel is a heavyweight investment firm led by Ken Griffin. KCG is the massive brokerage firm formed by the merger of Knight Capital and GETCO.

Citadel, KCG and Wedbush have offered bids to buy shares of the Bitcoin Investment Trust (BIT) since it was listed on the OTC Markets in March, The Journal reports. The BIT holds bitcoin in a trust in which accredited investors can then buy shares. Trading could begin as soon as this week.

KCG is “actively exploring various opportunities related to” bitcoin, its spokeswoman Sophie Sohn tells The Journal.

Some experts say use of the bitcoin by investors and traders will help to further legitimize the currency and increase its usage throughout the economy.

mf_monkeymathTo be sure, there is some skepticism about the BIT. The fund’s manager, Grayscale Investments, charges a 2 percent annual fee for administration and safekeeping, CNBC reports. That’s more than what most exchange-traded funds (ETFs) charge. One skeptical sell-sider has this to say about that..

“BIT investors may end up paying 5 percent more for shares of the fund than if they simply bought bitcoin on an exchange”, Eric Mustin, vice president of ETF Trading Solutions at WallachBeth Capital, tells the news service.

“People who read tabloids deserved to get lied to, and that’s how I feel about someone buying a bitcoin ETF,” he notes. “If you’re confident in this currency that you want to buy it, but you can’t take the 30 seconds to set up a wallet, which is incredibly easy, then you deserve to pay the 5 percent or whatever. I’m not cynical about bitcoin, but I just think it’s a goofy way to trade it.”

The Man Who Is Transforming Equities Market Structure: Dark Pool Killer Targets Maker-Taker

For those who might have missed it, Jeffrey Sprecher (pictured above), the CEO of Intercontinental Exchange, which owns the NYSE, is determined to put the genie back in the bottle by turning back the market structure changes that have taken place over the past 10 years, including the surge of “dark pools” hosted by leading investment banks which internalized all institutional order flow and the dominant use of complex “maker-taker” fee models that exchanges have provided as a means of capturing order flow to their venues.

genie-bottle-blue-smokeAs reported by the WSJ  2 days ago, Sprecher has been negotiating with all of the major banks that operate dark pools and offering a %90 reduction on NYSE exchange fees if those banks will send the order flow back to the NYSE. According to the latest news, those banks are apparently on-board with the notion proposed by Sprecher, yet KCG, the group formed by Getco and the former Knight Capital, a major “market-maker” is opposed.

Here’s an excerpt from the story by WSJ’s Bradley Hope and Scott Patterson:

“..Under the proposal, the NYSE would drop the fee for trading stocks at its exchanges to five cents per 100 shares from 30 cents per 100 shares, the people say. Banks, in turn, would accept a rule known as “trade at” that would give more precedence to the stock exchanges for most orders. A trade-at rule would mandate that stock trades take place on exchanges unless private venues offered a better price. Advocates of the rule say it would force a significant chunk of the stock trades that occur away from exchanges back onto them.

Credit Suisse AG, which operates the largest dark pool in the world, has endorsed the proposal, according to a person familiar with the matter.

Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG, J.P. Morgan Chase & Co., and UBS AG—which are among firms expected to be affected by the proposal—declined to comment.

“We’re actively involved in discussions with ICE and we are optimistic about the proposal yielding positive results,” said Jamie Selway, a managing director at Investment Technology Group Inc., a brokerage that operates a dark pool.

Last month, Nasdaq announced it was drafting a pilot program that would test the effect of lowering trading fees on a group of stocks. The pilot is scheduled to begin in February.

The NYSE proposal would require approval by the Securities and Exchange Commission and is likely to face opposition. Among the critics is KCG Holdings Inc., a brokerage firm that operates dark pools and a business that matches up retail stock trades.

“Mandating trading on exchanges is an elephant-gun approach motivated by commercial interests of a handful of market participants,” KCG said in a statement Wednesday.

The ICE proposal has been in the works for more than a year, according to people familiar with the situation.

Mr. Sprecher and Thomas Farley , the ICE executive appointed as president of NYSE Group, began discussing a variety of changes to their markets, including a reduction in fees, with Wall Street firms about nine months ago, according to a person close to the discussions. The goal was to try to get long-term investors such as mutual funds, as well as banks and high-frequency traders, to unite behind a broad restructuring of the market that included lower fees, the person said. Credit Suisse became more deeply involved in the discussions several months ago, the person said.”

 

The full WSJ story is here