Getting Best ETF Execution in the Secondary Market

Transcription

1 Getting Best ETF Execution in the Secondary Market 20 October BST/15.00 CET Sponsored by:

2 Speakers Paul Amery Editor IndexUniverse.eu Journal of Indexes Europe Ryan O Connor Vice President Global ETF Capital Markets Group, SPDR ETFs Slawomir Rzeszotko Vice President ishares Capital Markets Todd Hollander Head of ETF Sales Jane Street Financial Ltd.

3 It s Easy to Submit a Question Click on the Question Mark Icon (?) on the floating tool bar on your web session. This will open the Q&A window in the lower right hand corner of your screen. Type your question into the small dialogue box. Click the Send button.

4 Webinar Content What is an ETF? Where are ETFs traded? How are ETFs traded? ETF Liquidity Ensuring Best Execution Question and Answer Session

5 What is an ETF? An exchange-listed fund that trades like a stock Derives its value from an underlying basket of securities 1 unit (share) of a EuroStoxx 50 ETF represents 50 index shares: unit TOTAL, unit SIEMENS... ETF value is linked to value of underlying via realtime exchange ETF primary and secondary markets ensure this

6 Primary vs. Secondary Market Creation ETF Sponsor Redemption ETF Sponsor ETF units Index Securities or cash ETF units Index Securities or cash Authorised Participant Primary Market Secondary Market Authorised Participant ETF units Cash ETF units Cash Traders / Investors Trades Traders / Investors

7 ETF Price vs. Primary Market Fair Value Band ishares Euro Stoxx 50 Source: Blackrock ETP Due Diligence, fund data as at 15 July 2011

8 The Secondary Market On-exchange On-Exchange: Order book ensures transparency Central Counterparty (CCP) mitigates risk Settlement period standardised Actual ETF liquidity may be understated Investors need market access

9 The Secondary Market OTC Over-the-Counter (OTC) or off-exchange Pricing can be tighter than on exchange Potential to handle larger trades More counterparties, but counterparty risk Less transparency Non-standard settlement Trades may or may not be reported

10 Percentage trades on OTC On or Off-Exchange? 90% 80% Reported OTC trades as a percentage of all ETF trades 70% 60% 50% 40% 30% 20% 10% 0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Source: Deutsche Bank, European ETF Market Monthly Monitor, October 2011 Deutsche Borse SIX Swiss Exchange London Stock Exchange NYSE

11 Ownership Costs Fund Ticker TER (bps) Time-weighted Average Bid-Offer Spread Jan-Sep 11 (bps) Round Trip Trading Cost as percentage of TER # ishares EURO STOXX 50 EUE LN % ishares MSCI BRAZIL IBZL LN % db x-trackers EURO STOXX 50 ETF XESX LN 0 30 NA LYXOR ETF EUROSTOXX50 DIVIDENDS LDIV LN % Powershares FTSE RAFI ASIA PACIFIC EX-JAPAN PSRA LN % Source ENERGY S&P US SELECT SECTOR ETF USD A XLES LN 30* % Source: London Stock Exchange # Assumes one round-trip trade in holding period at time-weighted average spread. TER is pro-rated over nine months *Management fee Trading costs can be much higher than management fees

12 ETF Bid-Offer Spreads Offer Price Market Maker P&L Creation Fees Forex Hedge Costs Taxes Source: Unicredit, Delta One Navigator Underlying NAV Bid Price Brokerage Fees Brokerage Fees Taxes Forex Hedge Costs Redemption Fees Market Maker P&L Bid-Offer Spread

13 Pricing Uncertainty Low price uncertainty Some causes of high price uncertainty: Multiple listings/trading venues Multiple currencies for trading and for underlying Multiple trading time zones for ETF/underlying Less liquid underlying assets (e.g. some bonds) High price uncertainty Source: Blackrock, ETP Due Diligence

14 On-Screen Liquidity Euro Equity ETF Source: Bloomberg, 18-Oct-2011 at pm

15 On-Screen Liquidity EM Local Currency Bond Source: Bloomberg, 18-Oct-2011 at pm

16 BID OFFER SPREAD (basis points) Euro Stoxx 50 ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Euro stoxx 50 Red - db x-trackers Euro stoxx 50 Blue - ishares Euro stoxx Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 LYXOR EURO STOXX 50 TR EUR LN Lyxor ETF Euro STOXX 50 FP Lyxor ETF EURO STOXX 50 GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

17 BID OFFER SPREAD (basis points) Euro Stoxx 50 ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Euro stoxx 50 Red - db x-trackers Euro stoxx 50 Blue - ishares Euro stoxx Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 db x-trackers EURO STOXX 50 ETF LN LYXOR EURO STOXX 50 TR EUR LN db x-trackers EURO STOXX50 ETF FP Lyxor ETF Euro STOXX 50 FP db x-trackers EURO STOXX 50 ETF GY Lyxor ETF EURO STOXX 50 GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

18 BID OFFER SPREAD (basis points) Euro Stoxx 50 ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Euro stoxx 50 Red - db x-trackers Euro stoxx 50 Blue - ishares Euro stoxx Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 ISHARES EURO STOXX 50 LN db x-trackers EURO STOXX 50 ETF LN LYXOR EURO STOXX 50 TR EUR LN db x-trackers EURO STOXX50 ETF FP Lyxor ETF Euro STOXX 50 FP ishares EURO STOXX 50 GY db x-trackers EURO STOXX 50 ETF GY Lyxor ETF EURO STOXX 50 GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

19 BID-OFFER SPREAD (bps) Markit iboxx Euro Corporates ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Purple - Amundi Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Lyxor ETF Euro Corporate Bond FP Lyxor ETF EURO Corporate Bond GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

20 BID-OFFER SPREAD (bps) Markit iboxx Euro Corporates ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Purple - Amundi Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 AMUNDI ETF EURO CORPORATES FP AMUNDI ETF EURO CORPORATES GY Lyxor ETF Euro Corporate Bond FP Lyxor ETF EURO Corporate Bond GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

21 BID-OFFER SPREAD (bps) Markit iboxx Euro Corporates ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Purple - Amundi Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 ishares MARKIT IBOXX EURO CORP BD LN Lyxor ETF Euro Corporate Bond FP ishares Markit iboxx EURO Corporate Bond GY AMUNDI ETF EURO CORPORATES FP AMUNDI ETF EURO CORPORATES GY Lyxor ETF EURO Corporate Bond GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

22 BID-OFFER SPREAD (bps) MSCI Emerging Markets ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Red - db x-trackers Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Lyxor ETF MSCI EMERGING MARKETS FP Lyxor ETF MSCI Emerging Markets GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

23 BID-OFFER SPREAD (bps) MSCI Emerging Markets ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Red - db x-trackers Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 db x-trackers MSCI EMERGING MKTS TRN IDX ETF '1C' (GBP) LN Lyxor ETF MSCI EMERGING MARKETS FP Lyxor ETF MSCI Emerging Markets GY db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF FP db x-trackers MSCI Emerging Markets TRN Index ETF GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

24 BID-OFFER SPREAD (bps) MSCI Emerging Markets ETF Spreads Solid Line - Deutsche Borse Dotted Lines - London Stock Exchange Dashed Lines - NYSE Paris Green - Lyxor Red - db x-trackers Blue - ishares Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 ishares MSCI EMERGING MARKETS (GBP) LN db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF FP db x-trackers MSCI Emerging Markets TRN Index ETF GY ishares MSCI Emerging Markets GY db x-trackers MSCI EMERGING MKTS TRN IDX ETF '1C' (GBP) LN Lyxor ETF MSCI EMERGING MARKETS FP Lyxor ETF MSCI Emerging Markets GY Source: Monthly spread averages from Deutsche Boerse, London Stock Exchange, NYSE Euronext Paris

25 Market Impact Of ETF Trade Source: Blackrock ETP Due Diligence

26 ETF Liquidity vs. Trading Volume Source: SPDR ETFs, ETF Trading and Execution in European Markets

27 ETF price vs. Underlying Liquidity Premiums and spreads for the ishares FTSE 100 ETF and the underlying index Source: Blackrock, ETP Due Diligence

28 Number of ETPs When Markets Become Illiquid 700 Distribution of Time-Weighted Average ETF Spreads on LSE over four weeks this summer /07/ /07/ /08/ /08/2011 Date 22 Spread within 1% Spread 1%-5% Spread 5%-10% Spread Over 10% Source: London Stock Exchange

29 Largest Spreads for Week 12-Aug-11 Name TIDM Time Weighted Spread ETFX WNA GLOBAL NUCLEAR ENERGY FUND NUKE 103% DB X-TRACKERS MSCI WCONSTAPTRN ETF XWSD 43% FTSE100 LEVERAGED ETF GBP XUL2 40% ISHARES S&P TIMBER AND FORESTRY (USD) DWOD 33% ISHARES S&P LISTED PRIVATE EQTY IPRV 24% ISHARES BARCAP EURO GOVNMENT BOND IEGL 22% TECHNOLOGY S&P US SEL SECTOR SOURCE ETF XLKS 20% ISHARES MSCI NORTH AMERICA IDNA 17% ISHARES FTSE EPRA/NAREIT DEV MKT PTY YLD FD USD IDWP 16% DB X-TRACK. FTSE 100 SPR SHRT DAILY ETF XULS 16% ISHARES FTSE/EPRA EUROPEAN PROPERTY FUND IPRP 15% ISHARES FTSE MIB IMIB 13% FTSE EPRA/NAREIT DEV MKT PTY YLD FD GBP IWDP 12% ISHARES MSCI RUSSIA CAPPED SWAP $ IRSS 12% ETFX DAXGLOBAL COAL MINING FUND COAP 11% DB HEDGE FUND INDEX ETF 2C XHFD 11% Source: London Stock Exchange

30 Price Intraday Bid-Ask Ticks 1400 Bid-Ask Ticks for IWDP LN on 8-Aug :00 09:12 10:24 11:36 12:48 14:00 15:12 16:24 ASK BID Source: Bloomberg

31 Why Were Spreads Large? Time-weighted average calculation uses all tick data During market volatility market maker(s) removed bid prices periodically Spreads jumped to 200% temporarily Median of one-minute time-weighted average spreads was lower around 1% Are investors protected from tail events?

32 Market Maker Obligations Vary by exchange Typical obligation to maintain quotes Within maximum spread bands (e.g. 1.5%, 3%, 5%) Above minimum market size For minimum % of continuous trading period (e.g.90%) Significant get-out clauses in volatile markets

33 Exchange Safeguards Deutsche Boerse London Stock Exchange NYSE Euronext Mistrade Cancellation Can take place upon application within 2 trading hours of receipt of execution Enforced cancellation of trades possible in exceptional circumstances No cancellation, except under exceptional circumstances such as trading on aberrant prices. Safeguard Rules Volatility Interruptions: If ETF trades beyond a threshold of price range around a reference price. Two reference prices and two corresponding ranges, "dynamic" and "static" are in place. The dynamic reference price derives value from the last executed trade, and the static reference from an auction. The threshold bands can vary: 1.5%, 3% or 5% for ETFs; and 3% or 5% for ETPs Volatility Interruptions: If the price of a potential execution is more than a defined percentage above or below the reference price, automatic execution stops and an auction is triggered for price formation. Range size can differ based on underlying liquidity. Also uses dynamic and static reference values derived from last price and recent auction prices, respectively. Volatility Interruptions: Trading is automatically suspended if ETF matching prices move beyond +/-1.5% or +/-3% around inav, the band size depending on underlying liquidity. Auction phase is then commenced until price falls back within thresholds, or no orders can be matched. Source: Exchange Rulebooks

34 Achieving Best Execution No easy answer Listing/currency of ETF is important Time of execution is important Limit orders offer some protection Measure quality of execution by benchmark (NAV, inav) For large orders, consider use of algorithm to source underlying liquidity (VWAP, TWAP) On-exchange or OTC?

35 Looking Forward Compulsory ETF trade reporting likely (MiFID) Importance of changes to market structure (exchange mergers, post-trade infrastructure) Increasing pressure for transparency Continued fragmentation?

36 Question and Answer Session Paul Amery Editor IndexUniverse.eu Journal of Indexes Europe Ryan O Connor Vice President Global ETF Capital Markets Group, SPDR ETFs Slawomir Rzeszotko Vice President ishares Capital Markets Todd Hollander Head of ETF Sales Jane Street Financial Ltd.