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September 13, 2012

BofA Merrill Expands ETF Algo

By James Armstrong

Bank of America Merrill Lynch plans to expand the number of exchange-traded funds traded by its ETF-specific algo. Known as ETF-aXe, the two-year-old algo currently trades 300 ETFs. The new editions could include funds that go beyond just U.S. stocks.

"We certainly see usage across a broad spectrum," said Dan Nachtman, Americas head for algorithm product management at BofA Merrill. "We respond to our clients when they request we cover a certain asset grouping or a specific ETF."

Unlike most algos, ETF-aXe looks not just at the price and liquidity of the name it's trading, but also at the price and liquidity of the assets underlying that ETF. It also looks at futures that correspond to the performance of the ETF, if there are any. That way, BofA Merrill execs say, the algo can come up with the most efficient way to deliver the entire order. BofA Merrill then executes the trade in ETF shares for the client, while its high-touch desk takes care of obtaining liquidity in the most cost-effective manner. That might include the creation or redemption of shares of the ETF.

"This optimization and execution happens in seconds," Nachtman said. "The client is returned only executions in the ETF, with our desk being able to assume and manage those underlying constituents, or the underlying futures."

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