Presentation on theme: "ETF Sales & Trading Toronto | 416.869.6654 Montreal | 514.394.8561 Exchange Traded Funds Structure and Market Making September 2014."— Presentation transcript:
ETF Sales & Trading Toronto | 416.869.6654 Montreal | 514.394.8561 Exchange Traded Funds Structure and Market Making September 2014
National Bank Financial Markets | Strictly Private & Confidential 1 Mutual Fund vs. ETF Structure BuyersFund Underlying Assets Sellers Market Makers ETF Underlying Assets Buyers Stock Exchange Sellers Mutual Fund Market StructureETF Market Structure
National Bank Financial Markets | Strictly Private & Confidential 2 ETF Market Making Process Stock Exchange Market Makers ETF Underlying Assets Buyers Financial Intermediaries Sellers Financial Intermediaries 1 st Level of Liquidity Primary Market Cash or Securities In-Kind Exchanged for ETF units The creation and redemption process distinguishes ETFs from mutual funds and closed-end funds ETFs track fair value due to market makers’ arbitrage potential and ability to subscribe/redeem Three levels of liquidity: (1) Natural buyers and sellers, (2) Market Makers and High & Frequency Traders (3) Primary Market subscriptions and redemptions 2 nd Level of Liquidity 3 rd Level of Liquidity Secondary Market
National Bank Financial Markets | Strictly Private & Confidential 3 ETF Arbitrage Arbitrage: The simultaneous buying and selling of an asset, or similar financial instruments, in different markets or forms in take advantage of price differences and obtain riskless profit. For example, if the market value of the underlying basket of stocks (on the offer side) is lower than the offer of the ETF, market makers would simultaneously buy the stocks and sell the ETF, and subsequently subscribe for the ETF by delivering the basket of stocks. Basket of Stocks - RY 8.0% - TD 7.4% - BNS 6.3% - SU 4.9% - etc…. Market Maker ETF Buy Stocks at 9.50 Sell ETF at 9.51 BID 9.49 OFFER 9.50 BID 9.48 OFFER 9.51 Market maker has locked in 1 cent per share in riskless profit
National Bank Financial Markets | Strictly Private & Confidential 4 ETF Arbitrage continued… Once the market maker has locked in riskless profit (i.e. 1 cent per ETF unit traded) the market maker can subscribe for newly issued ETF units by: Delivering the underlying basket of stocks that was purchased In exchange, taking delivery of ETF units to cover its short position Basket of Stocks - RY 8.0% - TD 7.4% - BNS 6.3% - SU 4.9% - etc…. Market Maker ETF Buy Stocks at 9.50 Sell ETF at 9.51 ETF Company Deliver underlying Basket of Stocks Receive ETF units in exchange for Basket of Stocks
National Bank Financial Markets | Strictly Private & Confidential 5 Automated Quoting Process Market Information Stock Data - TSX - NYSE - NASDAQ Bond Data - Pricing Source - Internal Futures Data - Equity - Bond - Commodity FX Data Market Maker Electronic trading programs TSX Market Makers quote 100s of ETFs daily Electronic Feeds ETF Electronic Quotes Fair value bid-offer is determined by underlying securities plus several other inputs Underlying can be baskets (index, sub-index, etc.), futures (Bullion, Nat Gas, etc.), ETFs, etc. Program’s goal is to minimize exposure, i.e. maintain a hedged position and make money Other inputs include: Ticketing Charges, Creation/Redemption Fees, Exchange Fees, Taxes, etc.
National Bank Financial Markets | Strictly Private & Confidential 6 ETF Liquidity More sellers than buyers More buyers than sellers For stocks, supply and demand drive stock price For ETFs, intraday supply and demand does not typically affect price; price is based on intraday fair value, which is based on the underlying index Stock Price More sellers than buyers More buyers than sellers ETF Price Close to Fair Value Supply Demand Supply Demand Single StocksETFs
National Bank Financial Markets | Strictly Private & Confidential 7 Presenter Greg Jones, Managing Director 416.869.6654 | email@example.com@nbf.ca
National Bank Financial Markets | Strictly Private & Confidential 8 Disclaimer To view company specific disclosures for any companies covered by National Bank Financial, please go to http://www.nbcn.ca/disclosure_english.jhtml & http://www.nbcn.ca/disclosure_french.jhtml http://www.nbcn.ca/disclosure_english.jhtmlhttp://www.nbcn.ca/disclosure_french.jhtml This document was prepared by the people (‘authors”) named above, who take sole responsibility for its contents. The content may have been based, at least in part, on material provided by National Bank Financial Research Department and other research providers to National Bank Financial Private Wealth Management. The information contained in this document is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, and in providing it neither the authors of this document nor National Bank Financial (“NBF”) assume any liability. The information is current as of the date on this document and neither the authors nor NBF assumes any obligation to update the information or advise on further developments relating to the topics or securities discussed. This document is intended for distribution in those jurisdictions where the authors and NBF are registered. Any distribution or dissemination of this document in any other jurisdiction is prohibited. The opinions expressed in this document reflect a trading perspective. This document has not been prepared nor approved by the NBF Research Department. NBF may publish fundamental research on the issuers discussed in this document, which may express a different opinion. NBF clients should contact their NBF representative to request such research material. NBF may engage in the trading strategies described in this document for its own account and may, as market conditions change, amend or change its investment strategy including full and complete divestment. NBF may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein and may receive remuneration for its services. As well NBF and/or its officers, directors, representatives, associates, may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise. This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of NBF.NBF is an indirect wholly owned subsidiary of National Bank of Canada.