A new study suggests that a cookie-cutter approach places limits on institutional use of ETFs
ETF growth among large investors is being limited because of their buy- and sell-side trading practices, according to a new report.
In newly released research, Greenwich Associates has found that equity broker-dealers, institutional investors, and market makers employ the same methods for trading ETFs as they do for equities, reported The Trade. This practice, the firm argued, often leads to sub-optimal executions.
Many investors are using algorithms and transaction-cost analysis systems that were designed for single-stock trading scenarios, not necessarily for ETFs. In addition, fixed-income ETFs trade on-exchange but move like the bond market, making equity traders uncomfortable when dealing with such vehicles.
“Today, the same execution algorithm used to trade IBM is often used to then trade high-yield bond ETFs,” said Kevin McPartland, head of research for Greenwich Associates market structure and technology. “While these instruments both trade in the US equity market, the reasons they trade and the way their prices are determined are completely different.”
To enhance the quality of executions and ramp up commissions from clients, Greenwich said portfolio managers and traders should regard ETFs as a separate asset class from equities, derivatives, or fixed income. The firm also said they ought to look at all the products available in the market, not just those they are comfortable with.
“For institutional use of ETFs to grow and mature, long-held structures for managing clients and trading products need to change,” McPartland said.
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