Nadig: Anatomy Of A Monster ETF Trade

March 25, 2014

The first is that the trade was printed after the market close. That’s why it didn’t show up on the intraday chart. The second thing to note is that it’s quoted to four decimal places of precision. That means this wasn’t a single trade, but has been derivatively priced.

That means it’s a combination of trading activity that resulted in a single aggregated price reported to the customer—and the market—as a block after the market closed. That’s what the “FT” means here as well, it’s a “Form-T” trade that’s done aftermarket through FINRA’s trade reporting facility.

The other thing of interest is the price—$17.0259 is substantially better than the actual price the ETF traded at most of the day. In fact, if you look back at the intraday chart, BZF only traded at more than $17 right at the beginning of the day.

It would be easy to think something weird is afoot here, but the story is probably much simpler.

I called Dave Abner, head of Capital Markets at WisdomTree, to talk about trades like this. He wouldn’t talk about this specific trade, for obvious reasons, but he was forthright about how the process works in a vacuum.

“Typically, big investors will let WisdomTree know that a trade like this is going to happen, so we can help give them guidance on the best way to execute the trade,” Abner explained.

And clearly that’s probably what happened here. And most likely, that call didn’t just happen with WisdomTree, it happened with the actual broker on the phone too. Let’s just guess it was Goldman Sachs, but it could have been any number of liquidity providers.

On that call, all the players developed a plan of attack.

“We consider ourselves to be mechanics experts,” says Abner. “We think we know more about how our funds work than most others in the industry. So every big trade, we generally have the conversation … not just on the way in, but on the way out, too.”

Again, on that call, Goldman (we’re guessing) and Windhaven developed a plan of attack for the trade.

It could have been as simple as: “Well, we know we’re doing a big redemption at the end of the day, so we’ll sell a pile of real nondeliverable forwards (NDFs) all day long knowing we’ll get them from WisdomTree when they trade in the shares.”

Or, they may be getting cash from WisdomTree, and simply need to lock in a price, which they do by hedging with the underlying stocks in the fund. It’s even possible they sold some shares in the open market throughout the day, and saved some for a redemption.

At the end of the day, the counterparty to Windhaven’s enormous trade (Goldman, or whoever it was), was acting as an authorized participant and presented the shares to WisdomTree and received either cash or NDFs in return.

Of course, it’s a crappy day to be at WisdomTree when this happens.

Nobody likes to see $500 million in assets walk out the door on an ETF that collects a 45-basis-point expense ratio totaling $2.25 million a year. But Abner was sanguine about that.

“If people work with WisdomTree’s Capital Markets team, they are going to have a good experience,” he boasts. “If they have a good experience, they’ll be back.”

This really highlights the beauty of the ETF structure the way few other trades I’ve chased down the rabbit hole can.

Again, BZF is an ETF that barely trades. But the underlying market—the currency market for the real—trades more than $60 billion a day, and that’s not including over-the-counter swaps. In that context, Windhaven’s $500 million bet doesn’t even move the needle.

And that’s why all the players in this story can shove an elephant through a knothole, and dominate BZF trading.

 


 

At the time this article was written, the author held no positions in the security mentioned. Contact Dave Nadig at [email protected].

 

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