Editor note: For those who didn’t get the”Best Ex Meets Worst Ex” memo, Ugo Egbunike from IndexUniverse spotlighted a block trade in QAI this past Monday that was apparently mangled by the executing broker, illustrating once again that ETFs are NOT stocks, and real best execution requires guidance from a truly-professional trader that actually knows how to execute ETF orders.
Someone got taken to the cleaners on Monday, buying 16,000 shares of QAI—a trade that highlight the nuances of market-on-close (MOC) orders. They could have avoided it. Here’s what happened, why and how you can avoid it.
At 4:00:00 p.m. ET, around 16,000 shares of the IQ Hedge Multi-Strategy Tracker ETF (NYSEArca: QAI) were executed at $28.83—that’s $1.28, or 4.64 percent, more than its last traded price of $27.55 at 3:59:59 p.m. Eastern time. It was completely unwarranted.
At 3:59:59 p.m. ET, someone was offering 12,800 shares at $27.56. The fund’s underlying value didn’t change in that one second. At the end of the day, its net asset value was $27.50.
| Time | Exchange | Bid Size | Bid | Ask | Ask Size | Trade |
|
3:59:15
|
NYSE Arca
|
100
|
27.51
|
27.55
|
3,900
|
|
|
3:59:59
|
NYSE Arca
|
200
|
27.51
|
27.55
|
1,600
|
|
|
3:59:59
|
EDGA
|
$27.55
|
3,800 | |||
|
3:59:59
|
NYSE Arca
|
200
|
$27.51
|
$27.56
|
3,800
|
|
|
3:59:59
|
NYSE Arca
|
200
|
$27.51
|
$27.56
|
12,800
|
|
|
4:00:00
|
NYSE Arca
|
$28.88 *
|
16,077 | |||
|
4:00:00
|
Nasdaq
|
200
|
$27.51
|
$27.60
|
18,000
|
|
* NYSE Arca Market Closing Price Source: Bloomberg
The trade was the result of a poorly executed market-on-close (MOC) order. MOC orders for NYSE Arca-listed ETFs are automatically entered into the NYSE closing auction, which is outside of the core trading session.
Unfortunately, orders in the NYSE closing auction are exempt from Rule 611: the Order Protection rule. The basic idea behind the rule is to protect investors from faulty trades by comparing all nationally placed quotes.
If a better price exists for a market order, it gets routed to that exchange before it can get traded at its current exchange. In the case of the MOC trade in QAI, there was no protection—the trade was exempt because it occurred during the auction and not during the regular trading session.
It seems likely that the buy order was entered as a market order into the MOC NYSE closing auction. Had it been a limit order, the buyer’s limit would not have been $28.83, which means the final execution price would have been great news. Given that the last price was $27.55, a market order must have been behind that terrible trading strategy. Continue reading