RT Journal Article
SR Electronic
T1 Seeking Optimal ETF Execution<br/>in Electronic Markets
JF The Journal of Trading
FD Institutional Investor Journals
SP 109
OP 119
DO 10.3905/jot.2014.9.3.109
VO 9
IS 3
A1 Kiran Pingali
A1 Jingle Liu
A1 Sanghyun Park
A1 Michael Baradas
YR 2014
UL https://pm-research.com/content/9/3/109.abstract
AB Exchange-traded funds (ETF) have had a phenomenal run in recent years, with both their number and assets under management (AUM) growing dramatically. Despite this rapid growth, the average daily exchange-traded volume of these ETFs has stalled and now appears to be in decline. However, on-screen liquidity is not a true reflection of an ETF’s total implied liquidity, which is composed of liquidity of the underlying basket, related derivatives, correlated trading vehicles, and exchange-traded volume. Because of these properties, traders need to understand the uniqueness of ETF market microstructure and use the right trading solutions to achieve optimal execution efficiency. Using empirical statistical analysis, the authors show that for small orders on relatively liquid ETFs, institutional clients are better off using broker execution algorithms to extract liquidity without creating significant market impact. For large orders on relatively illiquid ETFs, institutional clients should leverage an electronic solution that can anonymously source block liquidity from market makers to achieve optimal execution.TOPICS: Exchange-traded funds and applications, quantitative methods