Liquidity-seeking algos for US ETFs rise in popularity - ITG
A new report from
agency broker ITG has highlighted a greater use of liquidity-seeking algorithms
for US exchange-traded funds (ETFs) but notes that institutional trading of such
instruments is surprisingly low.
According to the
report, ‘Institutional trading in exchange-traded funds’, 53% of buy-side
trading in ETFs was executed via algos, similar to the proportion of equities trading using algos in the sample analysed.
schedule-based strategies accounted for 35% of algo-based executions down from
51% in 2010. Liquidity seeking strategies accounted for 24% of ETF algos,
compared to 19% for implementation shortfall, 13% for DMA and 7% for dark
The cost of
trading using a liquidity-seeking algo was 0.83 bps, less than half the 1.91
bps cost observed when using a scheduled-based strategy, according to the ITG
The report also
compared the spreads and volatility of two of the most liquid ETFs, the SPDR
S&P 500 and the iShares Russell 2000 index ETF, and their underlying
constituents. It found narrower spreads and lower volatility in ETFs compared
to their stock equivalents – 1 bps spread and 17% average 60-day historical
volatility for the SPDR ETF, compared to a 5 bps spread and 29% average
volatility for S&P 500 stocks.
based on an implementation shortfall benchmark were also examined, with ETF
fees ranging from 1-3 bps for an IS benchmark, compared to 6-60 bps for
“Trading costs for ETFs were lower due to their
relatively better liquidity characteristics, most particularly in the top ten
ETFs by volume,” read the report.
perceived their perceived benefits, only 5% of institutional trading activity
was ETF-based last year, compared to 4% in 2010, although 31% of institutional
investors in ITG’s survey traded over 5%.
“The numbers suggest that ETFs are cheaper to
trade by a wide margin, relative to single stocks,” read the report. “We can
rule out simple things like order size as a driver of such results, but issues
surrounding liquidity, risk, and associated trading costs have been shown to be
quite complex. In the context of practical ETF trading implementations, this
area deserves further scrutiny.”