Bloomberg Tradebook

Don’t Judge ETF Liquidity Relying Solely on the On-Screen Volume

by Mike Baradas and Gary Stone

ETF Liquidity

Secondary market or on-exchange liquidity is not an indication of the true liquidity of an ETF. For many ETFs, the available liquidity is much higher. Although the exchange-based liquidity may make the ETF look illiquid, the ETF is very liquid when you take into account the liquidity you can get by trading the underlying basket. Traders need to operate in both liquidity pools. They should use an algorithm to trade the exchange-based liquidity and, at appropriate price levels, use Bloomberg Tradebook’s Execution Consultants to get an anonymous quote for block liquidity. The Tradebook Execution Consultants can source anonymous quotes from a liquidity provider that can tap the liquidity in either a correlated instrument, related derivative or an authorized participant that can trade the underlying basket and submit the ETF “Basket” to the ETF fund administrator to create an ETF.

The sheer numbers of Exchange Traded Products (ETP) and assets under management (AUM) have grown dramatically over the past four years. Since the beginning of 2010 to the end of 2012, the number of ETPs has grown 63%—to 3,169 different funds. ETP growth is truly an indication of the tremendous amount of change occurring in the asset management industry. Rosenblatt Securities analyst Justin Schack observes that while outflows from mutual funds have reached $261bn since May 2010 (the flash crash), $314bn flowed into U.S. equity ETPs during the same post-flash crash period.

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Michael Baradas began his career on the International Equities Program Trading Desk at Societe Generale in 1994. He then traded several proprietary trading books in the Equity Derivatives department: Single-Stock Options Volatility, Convertible Arbitrage, High-Yield, and Risk Arbitrage. In 2006, Michael joined Bloomberg Tradebook. He helped build the Cross-Asset Trading Platform for Equities, Options, and Futures. Currently, he leads the ETF Solutions business for Bloomberg Tradebook.

Gary Stone has been with Bloomberg since 2001. As Chief Strategy Officer, he is responsible for the discovery of innovative and unique products and forming strategic relationships for Tradebook. He began as a Senior Analyst before being named Director of Trading Research & Strategy in 2004, adding Tradebook development to his responsibilities in 2007.