Bank of America Merrill Lynch released to clients an exchange-traded-fund algorithm that automatically sources less-liquid ETF shares at the cheapest price. The process up until recently had been done manually by traders.
Previously used internally by BofA Merrill, the algo-christened ETF-aX-is set up to identify the cheapest combination of ETF, stock and futures contracts for the underlying ETF securities. This helps the firm deliver its clients shares of less-liquid ETFs that might not be found in the cash trading markets.
The algo automatically purchases a combination of ETF shares, stocks and futures contracts and then recombines all the separate securities and delivers a complete ETF share to the client.
According to Charlie Whitlock, a director in execution services at BofA Merrill, liquidity in less popular ETFs is not deep enough to meet client needs. So ETF-aX scours the marketplace to find the stocks at the cheapest to create the ETF shares. This differs from the past, when sales traders would normally work the order.
“The customer sends us an order for the ETF, and that is exactly what they get back,” Whitlock said. “We’ve seen price improvement from one to several basis points for ETF-aX, versus using a more traditional liquidity sourcing product.”
BofA Merrill used the algo on its desk before rolling it out to clients, Whitlock said, adding that the desk learned that the ETF algo sources on average 30 percent more liquidity than traditional low-touch products, such as an aggressive liquidity-seeking algorithm.
The algo is part of Bank of America Merrill Lynch’s suite of products, but is offered to clients at a premium, due to the costs of locating the securities of various asset classes and reconstituting them into ETF shares. The firm also commits capital to execute ETF-aX trades if necessary.
