In my experience, many investors are aware of the existence of the every-15-second last-sale NAV proxy value, but few know how to find it for a particular ETF and even fewer think about how, if at all, to use it. It is probably a good thing that these proxies are not widely used. Any attempt to use them to manage an order is more likely to lead to disappointment than to a good execution. The information on share values, transaction prices, bids and offers summarized in Figure 1 indicates that ETF bid and offer updates are published more frequently than every 15 seconds (every time portfolio component bids or offers change materially), making the ETF share bids and offers a much better indication of the current market for an actively traded ETF than the every-15-second last-sale proxy calculation could possibly be.
The posted ETF bids and offers also have the advantage of being something you can trade with. You cannot trade with the every-15-second NAV proxy because it does not represent a bid or offer for the ETF shares. An investor can be confident that, even if his market data vendor is a bit slower and updates quotes less promptly than the best data vendors, he will not be seriously disadvantaged relative to other retail market participants. Bids and offers for the most actively traded ETFs tend both to be tighter and to change more frequently than stock quotes during active trading periods. In active trading periods, spreads are frequently as narrow as a penny per share between the bid and offer for some of the most actively traded ETFs. These periods of active trading are the best time to trade ETFs. However, if trading is not active, the quotes in the market tend to reflect a wide spread between the bid and the offer.
The Brave New World Of High-Frequency Electronic Trading
Few individual investors have the kind of information professional traders use or the capability to change their bids and offers as fast as the quotes on an ETF share change in common market situations. Professional traders and market makers not only calculate intraday bid/offer values for ETF shares continuously throughout the trading day, they use automated quote management systems that can change their ETF bids and offers in a millisecond or so (a millisecond is 0.001 of a second) every time the bid or offer changes for any security in the ETF’s portfolio. The fact that regular-session ETF trading volume usually exceeds 2 billion shares per day is partly due to the speed of order entry and execution to capture small changes in value. The quest for speed of execution has led the Nasdaq market to boast “peak [round-trip] trading speeds of 250 microseconds” (a microsecond is 0.001 of a millisecond). In this high-speed environment, time lags associated with information traveling even a few hundred miles at approximately the speed of light confer a premium value on computer centers located within a few yards of an exchange order-matching system.
If you have access to an institutional equity trading desk, ask to see an active montage monitor of the best bids and offers from all the markets trading SPY or QQQQ during regular trading hours. I have not included a static example of the montage monitor because a snapshot cannot convey a sense of the frequent and rapid changes in bid and offer prices and sizes. I have not seen comparable displays from any other activity except, perhaps, the last digit in an electronic sign showing an update of the estimated U.S. population. The census sign has only one or two high-frequency flashing digits. The montage monitor looks like a time-lapse video of a beehive. An individual investor can benefit from high-speed trading developments to the extent that they compress bid/offer spreads in actively traded ETFs. Investors using actively traded benchmark index ETFs trade in a very efficient market thanks to high-speed trading.