A blog on the Wall Street Journal site by Geoffrey Rogow and Ian Salisbury hints at the revolution that ETFs have caused in the financial markets.
There are some fascinating facts in their piece, some familiar to those following the industry and some less so. Trading in ETFs now constitutes a third of daily US stock market volume, more than doubling from the 14% share they had in 2006. The iShares Russell 2000 ETF secondary market bid-offer spread, which averages 0.02%, is around a third that of its constituent shares. Aren’t we regularly told by ETF issuers that their funds are as liquid as the underlying shares or bonds in the index? Here we have a case where a fund appears to be more liquid than its components. If an ETF can create a virtous circle of liquidity then that’s great news for investors.
Meanwhile, comments from Wall Street trading firms show that they are suffering from the real efficiencies that ETF trading brings. If ETF investors are getting a good deal, then trading firms, which would prefer to be dealing in single shares, expensive options and structured products, are under real pressure.
And – rather than upgrade their ETF dealing teams, say the WSJ bloggers – the banks are investing in their options franchises, hoping that there will be a return to high margin business. Of the 12 banks interviewed by the newspaper, only one had added to its ETF trader numbers. After all, this is an industry whose employees are accustomed to free options, bonuses that are a multiple of base salary, and walking into new jobs if things don’t work out on a current business line. Why change now? Maybe Ben Bernanke’s helicopter drop of dollars will get things rolling again soon and investors will ditch boring ETFs, piling back into CDOs and the opaque securities which were such a money-spinner for most of the decade.
It’s not all a one-way street, of course. The entry of three leading US securities houses into the ETF market a couple of weeks ago under the Source banner shows that many firms want to have a foot in the ETF camp.
All the same the bankers’ comments in the WSJ blog suggest that many are still hoping that ETFs will go away, or at least shrink in importance. The securities and fund management industry appears to be largely in denial about the seismic change represented by the advent of cheap tracker funds.
What’s good news for investors is bad news for the big trading firms – at least in their current set-up.