Bank of America Merrill Lynch has extended its exchange-traded fund (ETF) specific algorithm to clients.
ETF-aX is designed to analyse market depth and price data across an ETF’s underlying portfolio to try and identify the most efficient combination of ETF, stock, and futures, before automatically trading them to source liquidity and find the best prices. The algorithm was previously only available to the bank's high-touch trading business.
ETFs are baskets of securities that provide exposure to an index or market sector via a single instrument.
“The primary challenge with trading ETFs is market fragmentation; liquidity is limited outside of the top-ranked ETFs,” said Charlie Whitlock, an execution consultant at BofA Merrill. “By using ETF-aX, clients are able to leverage our in-house ability to trade a combination of the component parts in different markets, gaining liquidity at more efficient pricing.”
Upon receiving a client’s order to trade an ETF, the algorithm analyses inside pricing and depth of book across the ETF, stock, and futures markets to compile a picture of available liquidity. Once ETF-aX determines the optimal way to transact, balancing best pricing against the need to capture the most liquidity, slices are simultaneously sent out to all market centres. A composite ETF price is assembled from the different executions and provided to clients.
Software firm SunGard confirmed purchase of ETF trading algorithm provider Fox River Execution on 26 July 2010.