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November 10, 2009

Outfoxing ETF Illiquidity

By James Ramage

Fox River Execution, in Geneva, Ill., thinks it's come up with a solution to trade blocks of illiquid ETFs without capital. It developed Fox Spotlight, in conjunction with research collaboration from the giant ETF manager iShares.

Spotlight, which acts as a pre-trade cost analysis tool, mathematically calculates the prices at which ETF arbitrageurs will trade to execute blocks of illiquid ETFs quickly and with--hopefully--the least amount of market impact, said Ron Santella, Fox River's chief executive. Once it determines the price, it will post an order in the public markets at that price and wait for the arbs to pounce.

With Spotlight, say a customer wants to buy 500,000 shares of an ETF that normally trades 100,000 shares a day. Fox River inputs the details into Spotlight. It calculates that the client can buy 500,000 shares of the ETF at, say, 4 cents from the midpoint, Santella said.

Armed with the information, the client electronically sends the order to Fox River, which then sends it over to the exchange using its own pipes. Fox River electronically executes the order at the calculated price, first by sweeping the lit and dark markets, and then by posting it to the displayed markets.

 

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