No One-Size-Fits-All Approach to ETP Market Structure

Traders Magazine Online News, May 9, 2018

Recently, the Securities and Exchange Commission hosted the first in a series of roundtables addressing market structure issues. The Roundtable focused on the market structure for thinly-traded exchange-listed securities (both equities and exchange-traded products), specifically the challenges faced by market participants for thinly-traded securities and potential improvements that might be considered to the market structure for these securities.  

A link to the SEC’s website on the roundtables follows. https://www.sec.gov/spotlight/equity-market-structure-roundtables.

The Roundtable consisted of three panels. The first two panels focused on the challenges in the market structure performance of, and potential improvements in the market structure for, thinly-traded securities, such as eliminating unlisted trading privileges (“UTP”) to concentrate liquidity in thinly traded stocks to their listing exchanges. The third panel focused on these issues but for exchange-traded products (ETPs). This summary will focus on the issues discussed relating to ETPs.

Panelists on the ETP panel were:

• Josh Kulkin, Head of Trading, Jane Street Capital
• David LaValle, U.S. Head of SPDR ETF Capital Markets, State Street Global Advisors
• Phil Mackintosh, Global Head of Economics and Research, Nasdaq
• Laura Morrison, Senior Vice President and Global Head of ETPs, CboeBZX
• Greg Sutton, Managing Director, Citigroup Global Markets
• Charles Thomas, Head of U.S. ETF Capital Markets, Vanguard Group
• Kumar Venkataraman, Professor of Finance, Southern Methodist University
• Doug Yones, Head of Exchange Traded Products, NYSEArca

There was a persistent theme throughout the Roundtable, i.e., that there should not be a “one size fits all” approach to market structure; this was no different as it related to the discussion of ETPs, according to ARi Burstein at Capital Markets Strategies. Several of the panelists emphasized that ETPs are different from single stocks, both in how they are constructed and how they trade, and that the SEC needs to take this into account when examining any changes to the current market structure.

Brett Redfearn, Director of the SEC’s Division of Trading and Markets, asked several questions of panelists during the discussion, playing off of the panelists opening remarks. The most significant issues discussed in response to those questions follow.

Measuring Liquidity for ETPs

A number of panelists noted that, as opposed to single stocks, ETPs can be thinly-traded but, at the same time, also highly liquid. Care therefore needs to be taken in the terminology used relating to ETPs, as well as the measurement of liquidity of ETPs. Significantly, panelists emphasized that ETPs are different from single stocks in that you need to look at the underlying basket to understand their liquidity. 

Several of the sellside panelists discussed how they examine the impact of trading in an ETP, and said that they look to the impact of having to trade in the underlying securities in the basket, i.e., deconstruct the ETP and examine the underlying. Brett Redfearn asked the sellside panelists whether there are some ETPs that are just too illiquid to touch. Two of the market makers stated that they would make markets in any ETP, but that the spread may just be wider in some. 

For more information on related topics, visit the following channels:

• ETFs
• Regulations