Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Retirement Compounders®
  • Free Email Signup

Is Liquidity Risk Lurking in the ETF Market?

August 29, 2019 By Jeremy Jones, CFA

By Borka Kiss @ Shutterstock.com

Can ETFs maintain liquidity during times of market turbulence, or should rules be changed to allow ETF providers to pay market makers directly in order to ensure stability? That’s the debate currently raging among market participants. At Bloomberg, Ksenia Galouchko reports on the problem and possible solutions:

Some see a potential cure in a practice that’s commonplace from Italy to the U.K. but banned in America: ETF providers paying market-makers directly. The argument goes that conflict-of-interest concerns are misplaced — and that traders under contract to keep transacting in passive instruments will do so come hell or high water.

While U.S. regulators are keeping mum on the issue, it’ll likely be a hot topic at industry conferences heading into year-end, said GTS’s Reggie Browne, who supports a “modernization” of ETF market-making rules.

“Particularly in times of stress and at the end of cycle, you never know what’s going to happen, and you want all participants to be active in the marketplace,’’ said the principal at the trading giant.

Increasingly fragile investor sentiment this summer is sparking ever-more extreme swings, with August registering a blinding Treasury rally, stock reversals rarely seen in this multi-decade bear run and a historic sell-off in some emerging-market bonds. ETFs are particularly vulnerable to sudden shifts in sentiment since they’re bought and sold throughout the day.

Paying market-makers directly would help ensure they remain committed to providing competitive quotes even if markets become roiled, some argue. Smaller products that are neglected by these traders under the current regime would stand to benefit the most, according to Louis Odette, a strategist at Citigroup Inc.

That’s because under current rules market-makers, who help to keep an ETF’s price in line with its underlying value, are compensated by exchanges according to trading volumes, leaving smaller funds vulnerable to being shunned when it becomes uneconomical to support them.

“If there’s market turmoil, the market-maker is more likely to step away if they don’t have a commercial obligation,” said Hector McNeil, co-founder of ETF platform HANetf in London and a 20-year industry veteran. “Market-making agreements create a very solid foundation and framework for issuers to demand a decent service level from the market-makers.”

Read more here.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Job Market Booms
  • Investors Building Risk by Blindly Pouring Money into Index ETFs
  • Oil Market Turbulence
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Money Market Assets Hit Record High: $5.4 Trillion - May 26, 2023
  • The Mania in AI Stocks Has Arrived - May 25, 2023
  • The Wisdom of Sam Zell - May 24, 2023

Search Young Research

Most Popular

  • Letter to the Federal Reserve Chairman from Your Survival Guy
  • What Does That Have to Do with Your Dividend?
  • Is an Investment Property Disaster Looming?
  • “I Came from Nothing,” He Said. “I Mean Nothing.”
  • Private Debt Funds: More Risk than Meets the Eye
  • The Wisdom of Sam Zell
  • How Activists Have Weaponized Corporate Boards
  • Is Japan Rising Once More?
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • When Did You Become Serious about Your Money?

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

The Importance of a Balanced Portfolio

Invest with Peace of Mind and Comfort

What Kind of Life Are You Investing For?

RSS The Latest at Richardcyoung.com

  • Pushing the Envelope Too Far
  • Your Survival Guy in Rome 30-Years A.B. (After Babson)
  • America’s Favorite Wordsmith Needs Tutoring
  • A Three-Week International Research Trip to Paris via Rome
  • BIOTERROR RISK: The Dangers Genetically Modified Insects
  • Why Be Proud?
  • What Does That Have to Do with Your Dividend?
  • Will Biden’s Ukraine Gambit Be America’s Worst Foreign Policy Disaster?
  • Stossel Says DeSantis Is “Smarter and Better than Biden.”
  • What Would They Give Up for “Equity”?

RSS The Latest at Yoursurvivalguy.com

  • Your Survival Guy in Rome 30-Years A.B. (After Babson)
  • Insurers Now Fleeing the Net Zero Insurance Alliance
  • A Three-Week International Research Trip to Paris via Rome
  • Will Biden Repeat Obama with US Debt Downgrade?
  • What Does That Have to Do with Your Dividend?
  • The ESG Cartel
  • Two More States Nearing Passage of Permitless Carry Legislation
  • How Activists Have Weaponized Corporate Boards
  • Letter to the Federal Reserve Chairman from Your Survival Guy
  • Big Blue Blob Cities Get Bad News from Census Report

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2023 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.