With Knight In Play, ETF Trade Will Be OK
You might think that having Knight Capital in play could be a threat to ETF trading. Luckily it’s not.
Still, it struck me that thinking through the possibilities surrounding an acquisition of Knight by Getco or Virtu is a worthwhile exercise.
After all, Knight is the biggest ETF market maker out there, and if Knight’s transition to new ownership is fraught with unexpected twists and turns, does that mean that many exchange-traded funds, especially the smaller, less liquid ones Knight shepherds, won’t get the love they need to trade cleanly?
Specifically, I found myself wondering if ETF trading would be adversely affected if Reggie Browne and his team at Knight don’t land on their feet but rather somewhere else on the Street.
If you’re wondering who Reggie Browne is, you need to read Ari Weinberg’s story in Forbes about Browne. Calling Browne “The Godfather of ETFs” did elicit derisive guffaws in some pockets of the ETF industry, but the piece makes an important point: Knight and Browne are big fish in ETF trading.
Knowing that makes the acquisition of Knight by Getco or perhaps Virtu entirely understandable. What upstart trading firm wouldn’t want that feather in its cap? It would be a strong signal that whoever ends up buying Knight has grown up and moved out of the sandbox and into the shark tank.
Incidentally, our thinking here at IndexUniverse on this potential acquisition of Knight is that this is pretty much a corporate story, that Browne and his team are likely to make a smooth transition to wherever they end up, and the world of ETF trading really won’t be affected whatsoever.
Still, as I said, I thought it might be worthwhile to look at the story behind the story.
And the crux of that story is that the ETF trading operation—that is, Reggie and his team—is a huge piece of the motivation to do this deal.
Numbers our Director of Research Dave Nadig crunched around the time Standard & Poor’s downgraded U.S. debt in the summer of 2011 showed that ETF trading makes up at least a third of all volume on U.S. exchanges on a dollar basis, and that that figure jumps to 40 percent on days of volatile trade.
That percentage will only increase over time as the exchange-traded fund continues to grow in popularity and importance. So who wouldn’t want Browne on their team?
But what if there were no Reggie Browne? What if he isn’t welcome at Getco or Virtu or wherever he ends up?
If CalPERS is taking hedgies out, ETFs may be coming back in.
As valuations grow uncomfortably high, ‘quality’ ETFs makes more sense—if you can figure out just what quality means.
‘Smart beta’ almost surely means loss of more market share for active managers.
Be careful of your assumptions (and headlines!) about volatility ETFs.