As activity in exchange-traded funds (ETFs) continues to build, Bernstein, the collaborative equity research and brokerage venture of Societe Generale and AllianceBernstein, has launched an execution algorithm for the product.
The algorithm seeks to bring ETF trading back onto exchanges. Currently, spreads are wide, and a lot of institutional clients use request-for-quote (RFQ) instead. Traders are wary of going passive, and never being met, or being aggressive and overpaying, Bernstein’s EMEA head of trading Jeremy Bruce explains to Global Trading.
“Our algo provides the accurate fair value, so you can choose to rest closer to that point. The bid/offer is not the driving factor,” he says. “It massively brings in the spread, so we can create liquidity on the exchange at the right price.”
In November, research and consultancy firm ETFGI reported that European ETF assets had reached a US$3.11 trillion high as of 31 October. The sector has seen net inflows for 37 consecutive months, and year-to-date, net inflows were the highest on record – US$333.22 billion.
Bernstein is not the first to offer an ETF algo. HSBC provides a Fair Value execution algorithm (ETFFV), and speakers at TradeTech earlier this year emphasised the value of such products.
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Where this product stands out, Bernstein argues, is in its direct link to Societe Generale’s data.
SocGen is a market maker in around 80% of ETF products across Europe, Bruce says, which gives them a specialised angle on this venture.
Frank Mohr, global head of ETF sales trading at Societe Generale, explains: “As a market maker, we quote these prices on exchange continuously. We know exactly what the fair price is because we get all the information from the issuers. We pass that information over to the Bernstein team, and they have the technology to put that into an algo.”
Also built into the algorithm is the ability to factor in premiums and discounts.
“It might know that, for various reasons, a certain ETF historically trades at 1% above or 2% below the price, for example. It takes that into account,” Bruce notes.
Mohr explains how trading in the market has evolved.
“In the beginning, ETFs were much more often an OTC business. That’s still a big chunk of the market, and as a market maker we are active on those RFQ platforms, where we show prices to institutional clients. The RFQ model is great in many ways, but it’s not always right. The algo is another way to fulfill the execution.”
“Algos have been used in the equity space for a long time, but more information is needed around an ETF for an algo to be built around it,” he adds.
Demand for more on-exchange ETF trading is coming from all angles. Mohr continues.
“Both clients and issuers want to see more products quoted and traded on exchange – that’s like a shop window for them; it attracts more clients. Bringing ETFs back on exchange because it makes the products more attractive and shows the liquidity.”
