Virtu urges SEC to further scrutinise risks of ETFs

Virtu Financial describes the ETF market as ‘an area that deserves a closer look’ in letter to US regulator.

Virtu Financial has called on the Securities and Exchange Commission (SEC) in the US to ‘study and contemplate’ the operational risk factors associated with exchange-traded funds (ETFs).

The electronic market-maker described ETFs as “an area that deserves a closer look” in a comment letter posted to the SEC earlier this week.

Virtu said it has to make a two-sided market in the ETFs right until the close, while buying and selling other securities, but it “cannot control the number executions as [it] goes into the close, nor anticipate [its] 4pm positions ahead of time with a great degree of accuracy.”

“The accompanying uncertainty is further compounded if we are unable to submit create and redeem orders as close to the market-close as possible,” Virtu added.

The letter also highlighted the slow electronification of the ETF market as another concern, especially when viewed in the context of its rapid growth.

Virtu explained transaction processing infrastructure for creation and redemption processes is not straight through and susceptible to human error.

“It is our view that a robust and automated FIX-protocol based interface to enter, modify or cancel orders for creation or redemption up until the stipulated cut-off will minimise the chance of human error,” it suggested.

In September this year, The TRADE caught up with Virtu Financial’s chief executive officer, Doug Cifu, to discuss the firm’s often misunderstood business model and the SEC’s push for transparency in the treasuries market.