Tough Trading: The Real Impact of Liquidity, ETFs & Correlation

Transcription

1 Tough Trading: The Real Impact of Liquidity, ETFs & Correlation Phil Mackintosh Global Head Trading Strategy Credit Suisse Equity Trading Conference, 2012 Slide 1

2 ETFs Gone Wild? ETFs have featured in numerous media articles as contributing to or causing many of the recent market ills: Traders seek salvage from correlation Volatility thy name is ETF Proof: ETFs a self fulfilling prophecy [ETFs] cause market distortions, choking recovery, preventing growth and IPOs Blame ETFs for lower volumes As ETF volumes fall, trading costs rise SEC looks into effect of ETFs on the market Slide 2

3 ETFs gone Wild? Slide 3

4 ETFs gone Wild? Slide 4

5 Active Management Faltered Two best factors Source: CS Quant Research Slide 5

6 Hedge Fund Performance Faltered Source: CS Dow Jones Hedge Indexes Slide 6

7 Active Managers Fight Back... New Entrants... Fidelity: plan to become actively involved in the ETF space. (Similar distribution model as Schwab, who has done relatively well). PIMCO Total Return fund in ETF form The world s largest mutual fund will be accessible in ETF form on March 1st. Legg Mason Alliance Bernstein Janus Dreyfus Eaton Vance SSgA Active *(Blackstone) But beware, active ETFs are yet to prove successful: 11% of listings 1% of total assets Slide 7

8 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Cost relative to Jan 2011 VIX Index Was it really tough trading? 2.0 Normalized Shortfall Costs (relative to Jan 3, 2011) VIX Guerrilla Inline VWAP CASH Slide 8

9 Do ETFs Cause Correlation & Volatility? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Realized Correlation vs Realized Volatility (1m) Correlation Volatility 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Slide 9

10 Do ETFs Cause Correlation & Volatility? Slide 10

11 What else could be causing such high correlation? Slide 11

12 Do ETFs Cause Correlation & Volatility? Academics say ETFs aren t a primary cause of volatility you can blame that on the financial crisis, a weak global economy, and the sovereign debt debacle in Europe. ETFs basically reflect the underlying market dynamics Phil Phan, interim dean of the Carey Business School at Johns Hopkins. Slide 12

13 What else could be causing such high correlation? Source: Measuring Economic Policy Uncertainty (Baker, Bloom, Davis) Slide 13

14 Mar.2000 Sep.2000 Mar.2001 Sep.2001 Mar.2002 Sep.2002 Mar.2003 Sep.2003 Mar.2004 Sep.2004 Mar.2005 Sep.2005 Mar.2006 Sep.2006 Mar.2007 Sep.2007 Mar.2008 Sep.2008 Mar.2009 Sep.2009 Mar.2010 Sep.2010 Do ETFs Cause Correlation & Volatility? 100% Quarterly Turnover (ETFs, Futures, Stocks) 80% 60% Stocks ~40% 40% 20% 0% Futures ~40% ETFs ~20% ETFs Futures All stocks Slide 14

15 Do ETFs Cause Correlation & Volatility? Slide 15

16 Do ETFs Distort Price Discovery? Stop thinking ETF investors are indexers! Slide 16

17 Do ETFs Distort Price Discovery? Sm art investors use Macros tools in Macro Markets! Slide 17

18 Do ETFs Reduce Liquidity? Slide 18

19 Do ETFs Distort Price Discovery? Slide 19

20 Do ETFs Distort Price Discovery? Slide 20

21 Do ETFs Distort Price Discovery? Slide 21

22 Is ETF liquidity bad ETFs increase retail trading Impact of Volker Rule A lot of ETF Arb = Good Source: Tabb Group Slide 22

23 Is ETF liquidity bad Exposure to a basket of stocks through a single trade. $$$ Buyers Sellers ETF ETF Market Makers Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Creation Redemption process Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares Com pany Shares ETF Slide 23

24 Is ETF liquidity bad Naturals will trade inside the spread ETF Spread Bids here will create profit for an arbitrager!! Unfavorable Fair Value Unfavorable Arbitrageur Com pany Shares Com pany Shares Com pany Shares Com pany Shares Company Shares Com pany Shares Com pany Shares Com pany Shares Bid Bid Bid Bid Bid Bid Bid Bid Bid Bid Stock Spread NAV-IV Last Last Last Last Last Last Last Last Last Offer Arbitrageur Offer Offer Offer Offer Offer Offer Offer Offer Offer Slide 24

25 Is ETF liquidity bad Careful trading MOC Slide 25

26 Is ETF liquidity bad Slide 26

27 Is ETF liquidity bad don't market makers have to buy and sell the underlying stocks every time an ETF tied to an index is traded? Slide 27

28 Do ETFs cause close volatility? Slide 28

29 Do ETFs cause close volatility? Slide 29

30 Do ETFs cause close volatility? Europe Close Slide 30

31 What about Levered ETF rebalancing? Slide 31

32 What about Levered ETF rebalancing? Slide 32

33 So what is it? Source: ICI Slide 33

34 The US ETF Market is a Major Competitive Success Asia, 405 ETP Listings (Sep '11) Asia, 90 ETP Assets (US$, Sep '11) US, 1335 Europe, 319 Europe, 2120 US, 969 America x- US, 242 America x-us, 48 Slide 34

35 The US ETF Market is a Major Competitive Success Our market structure gives us a competitive advantage Traders (liquidity+arbitrage) transparency & transaction costs Breakdown of Global $Value Traded through July 31 (amounts in Billions) Breakdown of Global $Value Traded through July 31 (amounts in Billions) US Equities, US $25,210, Equities, $25,210, 47% 47% Asia, $10,324, Asia, 19% $10,324, 19% US ETFs, $10,426.7, US ETFs, $10,426.7, 19% Europe, $8,148, 19% Europe, 15% $8,148, 15% Slide 35

36 Are ETFs taking over? Over $1 Tr Slide 36

37 Key Points ETF investors are smart You too could use ETFs for hedging & alpha ETFs are a US export! Don t believe everything you read in the papers! Slide 37

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