US ETFs: Where They Trade
13 exchanges, 30+ alternative trading systems (ATSs), and many other non-exchange venues
US regulators have sought to facilitate a balanced market structure that promotes competition among trading venues while ensuring linkages among trading venues to provide opportunity for investor orders to meet.
ETF Execution Strategies
Overview of ETF execution strategies for institutional size orders.
Additional considerations include trade size, ETF secondary liquidity, time of day, volatility, and underlying security market structure.
Increased Use of RFQ Platforms for Block Trades
US ETFs: Market Structure Linkages
There are four main types of linkages connecting the US equity trading venues, ensuring that competition among trading venues does not detract from the opportunity for investor orders to meet directly.
Linkages Across Trading Venues
Trade-through rule: Rule 611 of Regulation NMS, known as the “trade-through rule” or “order protection rule,” forces price competition across trading venues in two ways: Restricts trades from occurring at prices worse than best displayed quotes in the marketplace Ensures that best displayed quotes in the marketplace are not bypassed by trades at inferior prices.
Consolidated market data: Consolidated market data allows trading firms to construct a consolidated view of order and trade data from multiple venues and thereby determine where to route orders.
Best execution: Brokers’ legal duty of best execution requires them to obtain the most favorable terms available when executing customer orders.
Smart order routing technology: Brokers have commercial incentives to provide high-quality order routing technology to ensure they are accessing liquidity across the various trading venues in an optimal fashion for their clients.
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ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
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Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
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Arbitrage: the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
SPY: The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index. The Trust seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index.
VOO: The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
IVV: The investment seeks to track the investment results of the S&P 500 (the “underlying index”), which measures the performance of the large-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
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