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Myth
1. Average Daily Volume looks very light so the ETF must be illiquid and difficult to trade.
Best Practice
ETF liquidity is driven off the liquidity of the underlying securities not ETF printed volume. ETFs can issue new shares and therefore offer additional liquidity as frequently as necessary. Authorized Participants use the creation/redemption process to facilitate trading and satisfy market demand.
Price
close to the price that I should expect to pay or receive for my trade.
4. I need a full creation block to get an AP to create and offer lower trading cost.
Size
Side
5. I should be able to access liquidity for my buy order but will not be able to access the same liquidity for my sell orders.
Execution Strategy
Contact third-party Institutional Program, Block and/or ETF desks Can also contact Market Maker/ Authorized Participant (AP)1 directly (need not be full creation unit size) May also want to shop around amongst multiple Market Makers for best quote Strategy is to target the NAV
Large
(e.g., Institution, Wirehouse Financial Advisor)
Large
(e.g., >25K Shares)
Medium
(e.g., Larger RIA)
Typically trade through Custodian (e.g. Schwab, Fidelity) May have option to trade away May have trading systems Will likely need to pro-rata allocate shares to numerous accounts Typically trade through Custodian (e.g. Schwab, Fidelity) Unable to trade away No trading systems Limited staff Pro-rata allocations may be necessary
Medium
(e.g., 10K-25K Shares)
Work with broker-dealer (B-D) arm of Custodian to access market maker liquidity Provide B-D with list of market participants/APs Certain 3rd party trading firms can also do step-out trades2 if advisor cant trade away Strategy is to target the NAV
Small
(e.g., Small-Mid RIA)
Small
(e.g., <10K Shares)
Work the block through 2-3 limit orders within quote depth (approx. 5K shares) Price order(s) within bid/ask but note ETF IIV (ticker.IV)3 Update limit price as market moves Avoid exceeding quote depth to minimize any market impact Avoid trading at open; wait for entire basket to start trading
For more information please contact IndexIQ: Julie Abbett, SVP and Head of Portfolio Management jabbett@indexiq.com 914-697-4934
1Authorized 2 3
Participants are typically large sell-side institutions, primarily market makers or specialists, responsible for the creation and redemption of ETF shares
Step-out trades allow the client to access market maker liquidity through a third-party trading firm without trading away from the custodian An Intraday Indicative Value (IIV) is published by NYSE for each ETF as a proxy for intra-day NAV