The ETF Liquidity Fund
The secondary market represents a limited portion of an ETF’s total liquidity
How ETFs Work:
- Creation/Refund
ETF shares may trade on the secondary market at a premium or discount to their net asset values, which may create a catalyst for creations or redemptions.
As the value of the ETF decreases relative to the net asset value of the portfolio, arbitrageurs may be incentivized to buy the ETF, sell the underlying securities (for in-kind redemptions), and redeem the ETF shares.
As the ETF increases in value relative to the underlying value (for in-kind creations) and create the ETF shares.
- Underlying Basket Liquidity
What is included in the iNAV and Fair Value estimates:
- Total transaction costs vary by asset class and location.
- Taxes on foreign transactions and currency talks directly increase trading costs.
- The effects on domestic and non-domestic trade costs are shown in the following example.
- Total Cost of Ownership
The expense ratio is not the only component of the ETF’s cost.
Hypothetical Example
Transaction costs represent a significant cost consideration for ETF users.
- ETF Market Structure and Execution Strategies.
US ETFs: Where They Trade
13 Exchanges, 30+ Alternative Trading Systems (ATSs), and many other non-Exchange locations.
U.S. regulators have sought to facilitate a balanced market structure that promotes competition among trading venues while ensuring linkages between trading venues to provide the opportunity for investor orders to be fulfilled.
ETF Execution Strategies
Overview of ETF execution strategies for institutional-sized orders.
Additional considerations include the size of the trade, the secondary liquidity of the ETF, the time of day, volatility, and the structure of the underlying stock market.
Increased use of RFQ platforms for block operations.
U.S. ETF: Tied to market structure
There are four main types of links that connect U.S. stock trading venues, ensuring that competition between trading venues does not undermine the opportunity for investors’ orders to meet directly.
Trading Venue Links
Rule of Exchange: Rule 611 of the NMS regulation, known as the “swap rule” or “order protection rule”, forces price competition on trading venues in two ways: It restricts trades so that they do not occur at prices worse than the best prices displayed in the market ensures that the best displayed quotes in the market are not overlooked by trades at lower prices.
Consolidated Market Data: Consolidated market data allows trading firms to build a consolidated view of order and trade data from multiple locations and thus determine where to route orders.
Best Execution: The legal duty of best execution brokers requires them to obtain the most favorable terms available when executing orders by routing orders.
Intelligent Order Routing Technology: Brokers have trading incentives to provide high-quality order routing technology to ensure that they access liquidity across the various trading venues in an optimal manner for their clients.