|Technology Is Not Always Your Friend|
|May 24, 2012-|
Page 1 of 2
Securities firm NSBO recently announced a joint venture with US brokerage WallachBeth, with the two firms collaborating in offering ETF trading services to European customers. Laurie Pinto, chief executive of NSBO, tells IndexUniverse.eu editor Paul Amery why he thinks investors should talk more to their brokers
IU.eu: Laurie, many people advising investors in ETFs suggest using limit orders to execute trades. Do you agree?
Pinto: No, I don’t, though there are times when an investor might want to submit a limit order. You also need to distinguish between institutional and retail investors and between liquid and less liquid ETFs.
But in my opinion institutions shouldn’t use limit orders. Leaving a limit order means giving valuable information to the market, and allowing market makers to have a potential edge with respect to the orders posted on screen. They can adjust algorithms in the less liquid parts of the market to move funds’ indicative net asset values (iNAVs), for example.
So if you don’t want to use limit orders, what should you do? Unfortunately, given the very high bid-offer spreads you witness on exchanges for many ETFs, you probably don’t want to transact with a market order either.
There’s an old cliché about leaving a limit order to buy a position but using a market order to exit. This is a useful psychological tool, but I don’t think it’s appropriate for many ETFs.
The exception to the rule would be for a retail investor transacting in a large and liquid ETF. Here I think that trading at a limit price might be appropriate.
IU.eu: So how should we deal in less liquid ETFs?
Pinto: First, you need to compare the price of the fund to its underlying NAV and see, if there’s a premium or discount, why it might be occurring. Is it because some of the markets in the index are closed? In a corporate bond ETF, it could be because the pricing of the underlying securities may be less than transparent.
Then I’d suggest calling a broker and asking them for a two-way quote. Don’t tell them if you’re a buyer or a seller.
IU.eu: Pick up the phone, in other words and forget your broker’s online dealing system?
Pinto: Yes. You may make an apparent commission saving for internet-based trades, but it’s easy to be penny wise, pound foolish. Get your broker to check the market, make him compete for you, make him hungry for your business. And make sure he has experience of trading in ETFs, so that he has an idea how to get best execution.
It’s not always obvious that trading electronically may not be a good idea, but in these kinds of instruments it’s common sense. For a lot of people, technology is not your friend.
IU.eu: A lot of European investors like to trade in ETFs at the end-of-day NAV. What do you think of this?
Pinto: If you prefer to trade at the end of the day in ETFs, then you should prefer to trade at the end of the day in shares and bonds, since that’s effectively what you’re doing. Trading at the end of the day means you’re missing up to eight hours of potential price improvement, but if that works for you, good luck. It’s an interesting timing call. I’m not going to pretend I know better, but it is a timing call on the market, all the same.
IU.eu: How helpful are iNAVs in guiding investors when executing trades?
Pinto: Some are very good, but they only work when there’s a continuous market in the underlying securities. Sometimes it can be a misleading piece of data, and you have to remember that ETFs can trade at a premium or discount to the iNAV for good reasons. So, again, it’s worth checking the market price to gauge what the real fair value is.
IU.eu: What should the average ETF investor make of all the trading platforms in Europe and, specifically, where should they go to execute trades?
Pinto: There have been lots of discussions about the fragmentation of European trading, not just in ETFs but also in shares. Has this helped investors? I think the answer is unequivocally no. Having a consolidated tape for ETF trades, which I know many issuers are pushing for, should help to allow investors to monitor best execution, but you still face the problem of multiple clearing systems. The complexities of the European market structure are unlikely to go away any time soon. If you route your trade electronically through one broker, they may think they’ve found the best price, but have they had access to all the platforms?