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ETF Sponsors Tackle Liquidity Issues with Market Makers


Educating investors about exchange traded funds has been an area of focus for most providers. As market makers attempt to boost liquidity in thinly traded areas of the market, it is becoming more important that investors understand how liquidity plays a role in their investments.

“It’s probably the biggest challenge that our business faces in terms of the education work we do to inform investors and advisors about ETFs,” said Bill Belden, head of product development at Guggenheim Investments, in an Ignites.com report. [Investors Favorite Reasons for Using ETFs]

The difference between a “posted quote” or screen liquidity is different from the actual price that an investor would buy or sell at if they worked with a professional trader directly. Capital markets teams are focused on educating investors on this difference, while also assisting in executing large trades and overall client services. [How Tracking Error Can Impact ETF Performance]

The Nasdaq pilot program will be the first spin on a program that aims at boosting trades for smaller, less traded funds, and areas of the market.  Sponsors would pay a fee to Nasdaq that would be disbursed to market makers to tighten quote spreads, or post larger quote sizes to strengthen market quality, reports Jackie Noblett for Ignites.

Screen liquidity is intended as a measure of comfort or confidence that investors use for entering or exiting a position, rather than taking the number at face value. [Why ETF Liquidity is More Than Just Trading Volume]

“In a lot of ways the market you are seeing in front of the screen is the storefront,” says Tim Coyne, global head of State Street Global Advisors ETF capital markets group.

The market maker programs are intended to smooth out the challenges of liquidity that the ETF structure is prone to. The electronic markets and structure of an ETF make liquidity harder to judge than it was in the 1990s. [Trading Smaller ETFs]

“If successful they should shrink the spread and increase the size of listed quotes to buy and sell and ultimately increase trading volume, three measures of liquidity increasingly important in investors’ ETF purchasing decisions. The market-maker programs should also have a positive impact on an investor’s financial performance,” Noblett wrote.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.