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In this edition, Dave Abner, Head of Capital Markets, speaks with Ken Dolan, Senior Vice President on the ETF trading desk at Jefferies & Company, Inc. He joined the desk in 2011 after spending nine years at LaBranche & Co. as a Managing Director and Head of ETF Trading.
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A Financial Times (FT) article entitled “Bond Market Sell-Off Causes Stress in $2 Trillion ETF Industry” set off a flurry of questions about the role exchange-traded funds (ETFs) played in Thursday’s market sell-off. A review of basic ETF operations and mechanics illustrates that ETFs not only functioned properly last week but that they are increasingly relied upon as liquidity and price discovery tools during periods of extreme market volatility.
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Exchange-traded funds (ETFs) are often criticized for their perceived illiquidity, especially when looking at “size on the screen.” Ten years ago, it was much more difficult to execute large blocks in ETFs. Now, however, the market has evolved drastically and there are a wide variety of liquidity providers willing to make very large-size markets in the broad spectrum of ETFs.
It’s surprising to me how many investors in significantly sized blocks of ETFs agree to trade at whatever price is offered to them. Essentially, it’s the equivalent to walking into a car dealership, without doing any price research, and paying sticker price. However, like a car dealership, the block trading market in ETFs, where liquidity providers make markets in large size to the advisor community, is a negotiable marketplace.
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