Hougan: Have size trends increased over time, or have you always seen billion-dollar trades crossing your desk?
Macklowitz: We've always seen them with some frequency, but the frequency has picked up recently, particularly as institutions rotate from high-cost products into low-cost products. That’s been a major change, and it’s been driving a lot of flow.
Hougan: What did the survey show you about how institutions are evaluating the liquidity of an ETF?
Macklowitz: Investors are getting a better understanding of how the liquidity of the underlying assets is linked to the liquidity of the ETF. Three or four years ago, that wasn’t true; there were lots of misconceptions. Increasingly, institutions understand that if the on-screen liquidity isn't there, they can still go to a market maker like Jane Street and get great execution if the underlying securities are liquid.
Hougan: In the survey, institutional investors noted they were concerned about trading ETFs with emerging market or high-yield bond holdings. What would you say to people worried about those asset classes?
Macklowitz: I think institutions correctly pointed out that those are the asset classes where the liquidity of the underlying is the most difficult to navigate, and where working with a trusted partner to evaluate that liquidity and trade ETFs is critical.
When it comes to emerging market ETFs, Jane Street has traders around the world looking at each underlying market, understanding fair values and interdependencies. For fixed-income ETFs, we have bond traders who work with ETF traders to source and price the underlying bonds. Our setup enables us to provide very competitive prices to our clients and makes us a good counterparty for institutions worried about these asset classes.
Hougan: Did the survey shed any light on how investors are doing pretrade analysis, or how they should be doing pretrade analysis? I think investors want to know how to understand if they’re getting a good deal or not.
Macklowitz: In terms of pretrade analysis, investors are tackling it from multiple angles. Firms are both doing their own pretrade analysis and also working with liquidity providers and the capital markets desks of issuers to evaluate ETF liquidity. We always recommend that investors ask for a two-way indicative market to get a better sense for the roundtrip trading costs.
Hougan: There was a remarkable difference in the survey on how investors execute trades by geography. In Asia, investors relied heavily on investment banks for execution; in the U.S. and Europe, there was more of a focus on independent market makers and agency brokers. What explains those discrepancies, in your opinion?
Macklowitz: ETFs are at an earlier stage of adoption in Asia, so clients often rely on established relationships with investment banks. In the U.S. and Europe, where the ETF market is more mature, it’s more common to work with specialized ETF liquidity providers. I think the survey showed that.
Hougan: What's next when it comes to the institutional usage of ETFs?
Macklowitz: It certainly feels that institutions are getting more comfortable with ETFs and using them as wrappers to manage portfolios more efficiently. As they increase usage overall, institutions are become more discerning with their trading counterparties and how these trades are executed; independent market makers like Jane Street are quickly gaining traction as a result.
Learn more about the ETF trading survey here.