V16-045 The Tool Beyond The Tool

Institutional ETF Trading 2018: The Tools Beyond the Tool | October 2018
Institutional ETF Trading 2018:

The Tools Beyond the Tool
V16-045 | October 2018 | www.tabbgroup.com
© 2018 TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission.
1
Table of Contents
Introduction ..................................................................................................................... 3
Vision .............................................................................................................................. 4
A Growing Market............................................................................................................ 6
Market Structure 201 ....................................................................................................... 8
Thinking Outside the (Tool) Box .................................................................................... 10
The Algo, the Block and the RFQ .................................................................................. 14
Basket Flexibility ........................................................................................................... 17
Conclusion .................................................................................................................... 18
About ............................................................................................................................. 20
TABB Group .............................................................................................................. 20
TABB Group Fixed Income Practice .......................................................................... 20
The Author ................................................................................................................. 20
2
Introduction
You can't get along without a knowledge of the principles and rules governing the influence of one
color upon another. A mechanic might as well try to get along without tools.
— Winslow Homer
The pronounced rise of the exchange-traded fund from a retail-oriented product into a cross-asset,
institutionally accepted financial instrument is in no small part due to its flexibility. Easy broad-market
exposure, functionality as a low-cost alternative to increasingly expensive derivatives, and the ability
to put money to work quickly are enduring selling points for the Financial Instrument ETF (a term that
reflects the product’s transition from a specific to broad application tool across asset classes). Along
with the rising tide of new alpha- and beta-focused trading trends, asset managers, pension funds
and insurance companies are rethinking how ETFs can ﬁt within their strategies.
Over the past several years, an increasing pool of institutions have embraced the instrument for a
handful of unique use cases that were previously unavailable to the market. These included portfolio
management strategies, tactical exposure, access to unique markets, hedging opportunities and the
use of an ETF liquidity sleeve for strategic exposure.
Exhibit 1: Investment Company ETF Net Assets
Source: TABB Group, Investment Company Institute
As of year-end 2017, ETFs made up an estimated 15.1% of the $22.5 trillion in net assets held by
investment companies in the US, more than doubling since 2010, according to the Investment
Company Institute (see Exhibit 1). The factors that drove the early adoption of ETFs by institutional
investors are now firmly entrenched. And as they grow more complex, global market require new
technology, tools and strategies of its participants. In this report, TABB Group outlines the workflow
changes and tools that are being developed to support trade decisions as the financial instrument
ETF continues to stand out in the institutional toolbox.
3
Vision
It comes down to cost. As interest rates rise and the ongoing lowering of management fees among
major ETF providers continues, institutional investors are beginning to wage their own war on trading
costs. In recent years, ETFs have become a ubiquitous tool for an increasing pool of institutional
investors seeking to gain exposure across many asset classes. In a 2017 TABB Group survey of
large buy-side firms, the top three reasons for using ETFs were easy broad exposure to a variety of
markets, ease of use and low cost (see Exhibit 2).
Exhibit 2: Institutional ETF Usage (Survey Result)
Source: TABB Group
The unique market structure and flexible exposures available to institutions today through ETFs is
growing in both range and complexity. How these pieces ultimately fit within the larger context of
established trading instruments is an ongoing question with many answers. Although the upshot of
these flexible characteristics is an instrument that can be leveraged as a tool, it has also created
technological and workflow efficiency gaps. These gaps offer an opportunity for innovation and
market structure evolution. So far, the roadblocks to the next stage in ETF adoption among major
buy-side institutions have been varied.
These roadblocks emerged from a lack of infrastructure, inadequate internal instrument expertise
and lingering concerns (of varying degree) that the ETF market lacks evidence of liquidity in times of
extreme market stress. In addition, a pervasive lack of education about the instruments and the
unique market structure that supports them haven’t helped. Looking ahead, these concerns will
continue to erode as more institutions pass the educational boundary required to enter the market.
4
TABB Group research indicates that the range of applications for ETFs among buy-side institutions
is still expanding and with it, so too will the list of tools required to navigate the trading landscape.
ETF issuers and liquidity providers that have the most resources in terms of trading, technology and
overall expertise, remain critical to the modern institutional ETF trading ecosystem, as they are most
often cited as go-to sources for the most reliable pre-trade information for trades that are oversized
with respect to the net asset value and complex liquidity. As more firms become fluent in the unique
institutional ETF trading ecosystem and feel comfortable moving away from traditional workflows in
which the bulk of trading is sent through the same ETF channels, the appetite for innovative trading
solutions to enter the market will only increase.
5
A Growing Market
Low volatility and bank capital adequacy requirements under Basel have forced dealers to reconsider
the means and extent to which they are willing to take on risk and provide liquidity. In turn, liquidity
in some fixed income markets has, over the past several years, suffered. This liquidity vacuum has
set the stage for some of the most significant pockets of growth and adoption of ETF trading among
institutional investors. In a broad sense, the low cost and easy exposure to nearly every corner of
the market has driven significant growth across all ETF markets (other than commodities) since 2012
(see Exhibit 3). Specifically, within fixed income, reduced balance sheet capacity on the part of the
dealer community, a lack of immediacy of execution, and concentration of credit market activity have
pressured liquidity for years. As a result, credit ETFs have been adopted to accomplish credit
exposure objectives.
Exhibit 3: ETF Net Assets Under Management by Underlying (Year-end 2017)
Source: TABB Group, ICI
Total net assets under management (AUM) in ETFs continues to rise dramatically. Based on ICI
statistics, from year-end 2016 to year-end 2017, ETF AUM rose by $874 billion, representing a 35%
inflow from $2.5 trillion to $3.3 trillion. Exhibit 3 breaks down ETF assets by underlying asset class.
Although ETFs that hold equity securities still make up the vast majority of ETF assets (given their
historical footprint), use of fixed income ETF instruments continues to grow as evidenced by the fact
that ‘bond and hybrid’ ETFs have the second highest AUM among the underlying ETF segment
groups.
6
Fixed income ETFs continue to stand out as a bellwether for innovation and further institutional
adoption. That is, the flexible exposure profiles (portfolio management, tactical exposure, three layers
[primary/secondary/underlying] of liquidity) that fixed income ETFs afford users is a novel utility
compared to the traditional index beta exposures of well-established institutional equity ETFs that
market participants have historically relied on. For 2018 year-to-date, investment-grade credit ETF
exchange volume expressed as a percentage of the underlying cash market is roughly 8%. This is
up 1% from the 2017 annual average. The growth in high yield ETFs is even stronger, with relative
turnover of 27% in 2018 compared to 20% in 2017 (see Exhibits 4 & 5).
Exhibits 4 & 5: High Yield and Investment-Grade ETF Exchange Volume as a Percent of Cash
Bond Volume (rolling average)
Source: TABB Group, BlackRock
The capital markets ecosystem is opening a new chapter that will be defined by rising interest rates
and the return of volatility. This will be a significant departure from the benign market conditions that
have supported markets in the post-Global Financial Crisis years.
In this scenario, the versatility of the institutional ETF will have its most important durability test and
an opportunity to prove its value as a buy-side tool. Underpinning this drama will be a significant gap
in market structure education and tools (of equal sophistication to those in other asset classes)
necessary to innovate and grow their ETF utilization between large (sophisticated ETF users) and
medium to small institutions.
7
Market Structure 201

Institutional adoption of ETFs outside the traditional equity context has created unique workflow
challenges that have forced the buy side to reevaluate its definition of best execution, choice in
exposure vehicle and the total cost of a trade decision. The foundation upon which institutions are
expanding or building out new ETF strategies is a 25-year history of one-dimensional equity-linked
trading among investors of all stripes. The appeal of the fixed income ETF instrument is not dissimilar
to what draws new firms to equity ETFs: Low cost, versatility and efficiency. The next stage of
adoption is a slightly larger slice of the institutional pie. Over the past several years, asset managers,
insurance companies and pension funds have begun to reorganize their strategies to incorporate
ETF exposure outside of traditional ways. As mentioned earlier, TABB Group’s buy-side outreach
has regularly highlighted low cost and easy access to broad market exposure (especially today within
fixed income) as top reasons for their increasing use of ETFs. The full list of ways in which ETFs are
being used as tools to hedge risk, obtain broad or targeted exposures, manage cash and navigate
illiquid and stressed markets is still growing. As this list grows, so too will the tools and internal
practices for instrument selection and deployment.
A long-standing problem facing some institutions looking to expand their ETF usage is around a
technicality that masks a more fundamental issue. Certain legal restrictions shape the exposure that’s
allowed through ETFs for some institutions. Firms solely focused on trading fixed income securities
may not be capable of trading ETFs (which are technically equity instruments) and would need to
rework existing internal infrastructure.
Exhibit 6: Institutional ETF Market Structure (edit colors etc)
8
Further complicating this issue is the unique market structure of the ETF (see Exhibit 6). With equity-
linked ETFs, most analysis is straightforward as the secondary and underlying volume — and the
pricing metrics — are fully transparent. For fixed income ETFs (particularly those with illiquid
underlying baskets), each has its own unique set of underlying liquidity metrics but the
comprehensive list of factors that can affect the execution and overall cost of the trade are myriad
(see Exhibit 7).
Exhibit 7: Primary and Secondary ETF Market Underlying Market Dynamic
Source: TABB Group, ICI
TABB Group outreach to the buy side has found that there are still significant steps that much of the
buy side will need to take with respect to workflows and internal practices to embrace ETFs for what
they have become — an outright asset class on its own, not an esoteric sub-species of the equity
market.
There are limitations, both practical and philosophical, that buy-side firms will have to overcome in
rethinking the workflow around their ETF deployment to move beyond this thinking. The real struggle
that underpins the instrument’s under-utilized potential is the asset class-centric view of how the
instrument should be traded. Historically (and currently) bond ETFs are analyzed and traded like an
equity regardless of the underlying basket. This entails equity-style pre- and post-trade analysis, cost
comparisons, accounting systems and risk measurement. As fixed income ETF trading continues to
grow in prominence, the buy side will need to learn to become more flexible with its use of ETFs and
embrace solutions that can translate the ETF into its relative metrics such as decompose fixed
income ETFs into fixed income metrics.
9
Thinking Outside the (Tool) Box

The breadth of trading and analytical tools buy-side firms have at their disposal to assist their ETF
trading needs is a clear reflection of the instrument’s ascension from retail product to multi-faceted
institutional tool (narrow to broad). Common themes that tools the buy side uses today share are
automation and efficiency. These themes exist within a larger capital markets trend in which firms
are finding new ways to do old things smarter and cheaper. There is still a great amount of room for
institutional ETF traders to adopt these tools. A first-order effect of the education gap among investors
with respect to ETF trading is a utilization gap. TABB Group outreach indicates that apart from quality
pre-trade technology that is ubiquitous across most providers, the integration of external tools with
internal due diligence processes is still nascent. The following section highlights the key areas in
which the market has seen the most significant evolution in institutional ETF trading (see Exhibit 8).
Exhibit 8: ETF Trading Tools Highlights
Analytical Trading
Relative Value Analytics OTC RFQ Protocols
Post-trade Analytics Order Routing/Execution Algorithms
Interpretive Exposure Analytics

Basket Trading (In-kind)
(Bond ETF conversion to yield/duration terms)
Bond ETF Pricing/Volume Analytics ‘Custom’ Basket Trading
Source: TABB Group
Product Selection
Cost pressures from an ongoing global regulatory overhaul have dramatically altered the cost of
running a business for buy-side firms active in the derivatives markets. In a 2017 TABB Group survey
of large pension funds, asset managers and insurance companies, 80% of respondents said that
they had experienced a significant increase in the cost of running their business (with an emphasis
on compliance and reporting obligations) in the post-regulatory overhaul environment.
Expanding upon the challenges that buy-side participants active in derivative markets face, TABB
Group outreach found that cost, the impact of bank capital rules, liquidity (or lack thereof) and
compliance obligations were the most significant challenges that institutions face in today’s
environment (see Exhibit 9, next page).
10
Exhibit 9: Biggest Challenges Facing Derivatives Users Today (Cross-asset, by mention)
Source: TABB Group
The result of these factors is an increased importance of product selection to gain the correct
exposure for the right price. On the fixed income side, the use of credit ETFs as an alternative to
traditional credit hedging instruments is increasingly common. Exhibit 10 breaks down high-level
points of differentiation between ETFs, cash bonds, total returns swaps and index credit default
swaps.
11
Exhibit 10: Comparison Grid of Credit ETFs and Traditional Credit Derivatives
Source: TABB Group
Putting the credit ETF alongside traditional means of fixed income exposure (cash bonds, index CDS,
TRS) speaks volumes to the initial hurdles the instrument has overcome over the past five years.
12
During the nascent stages of institutional ETF adoption, education was the most significant
roadblock. While today, a pervasive lack of expertise in basic market structure and
primary/secondary market dynamics among small to medium buy-side firms remains, the largest (and
most ETF-fluent) institutions are asking for tools to help tune their ETF trading on a nuts and bolts
level. Sophisticated users of ETFs have shifted their emphasis to relative value analysis between
new (ETFs) and established credit market access vehicles such as CDS Index and Index TRS, which,
in turn, has uncovered previously advantageous uses of the instrument over legacy
vehicles/methods.
This evolution mirrors the organic changes unfolding in the cash corporate bond market, in which the
proliferation of electronic execution and processing venues has laid the foundation for new data-
centric trading strategies and best-execution considerations. For the majority of small and medium-
sized buy-side firms that TABB Group spoke with, the data points with which most firms evaluate
liquidity and make trading decisions with respect to their ETF selection (in both ETF-to-ETF and ETF
versus other instrument considerations) was a combination of bid/ask spread, ETF assets under
management, average daily volume, underlying basket thresholds and portfolio manager discretion.
Post-trade solutions such as third-party TCA reports are also being utilized in the pre-trade process.
Pre-trade ETF analysis remains a largely undeveloped process for most firms, in part due to a
perceived lack of technological solutions available and a lack of ETF trading expertise. Market color
and other services provided by ETF issuers, a core set of dealers, and trusted market markers remain
the key elements of the pre-trade equation for most firms that TABB Group spoke with.
The next level of sophistication with ETF trading (for fixed income in particular) is taking a centralized
approach to trading and analysis. The role that fixed income ETFs play within an average institutional
portfolio has grown in recent years. As this role has grown, firms have increasingly required the ability
to manage their cash bond, derivatives and fixed income ETFs from a single blotter. This ability has
been a key component to the success of electronic platforms such as BlackRock’s Aladdin platform,
which affords users the ability to integrate execution with deeper analytics and compliance engines
to support pre- and post-trade workflows.
This integration has led to a significant departure from the traditional equity-centric analysis originally
used for all ETFs, and has given buy-side traders more freedom to explore ETF applications. ETF
providers have recognized that there was a disparity between the fixed income ETF market, which
uses a price quoting convention, and underlying fixed income instruments, each of which have unique
metrics (price, yield, duration conventions) (see Exhibit 11).
13
Exhibit 11: Comparative Quote Conventions
Instrument Quote Convention
Bond ETF Price

Investment-Grade Bond Spread (Over government Securities and swaps)
High-Yield Bond Price/Spread
Credit Default Swap Indexes (CDX) IG: Spread
HY: Price or Spread
Treasury Bonds Price in 1/32nd Increments
Treasury Bills Yield (Discount Yield)
Floating-Rate Notes Spread (Discount Margin)
Emerging-Market Debt Price/Yield/Spread
Bottom-up aggregation tools for bond ETFs, such as Bloomberg’s YAS functionality, utilize the fact
that if a basket of an ETF is static, aggregate cash flows can be used as a comparative yield metric
for an imaginary bond. That allows for apples-to-apples comparisons with other cash bonds and
credit derivatives.
For ETF-to-ETF considerations more emphasis is put on the liquidity cost. In this comparison, the
size of the ETF and the diversity of the current holders of the ETF are key considerations. For
individual ETFs, the composition can be dramatically skewed toward concentration or diversification.
In comparing the liquidity of similar ETFs, firms TABB Group spoke with remarked that the ability to
look at average daily volume over a varied range (six months or 20 days, for instance), average
bid/ask spreads and short- and long-term NAV tracking error as a percentage of the NAV itself was
most important. In most cases, these metrics allowed them to assign an average premium that will
inform the trader of the natural range of price versus the NAV in which the ETF exists.
For the most sophisticated users of ETFs who are looking to pinpoint the exact round-trip price of
one ETF versus another, additional layers of analysis are commonly applied. Anecdotally, if a highly
liquid ETF trades with a long-term average premium of 8 basis points over the NAV, a short-term
analysis might reveal a short-term premium of several basis points on a given trade. For an efficient
portfolio manager with a group of ETFs that have similar exposure profiles, a trading decision is often
a matter of various market conditions as well as overall performance. There are opportunities here
for solution providers to streamline this analysis and correlate large standard deviations from NAV
for harder-to-gauge fixed income market liquidity situations.
The Algo, the Block and the RFQ

Amidst the ETF trade fee duels, solution providers are introducing innovative analytical and trading
tools, setting themselves apart from the fray. Similar to the organic shift to electronic workflow in the
US credit market, there is a growing appetite from institutional ETF traders for automation and time-
saving solutions across all sub-asset classes in fixed income.
14
TABB Group research indicates that efficiency tools are the fastest growing subset of electronification
for the corporate bond market, and that the model through which the institutional ETF market is
evolving is not dissimilar. The electronic bridge between previously siloed stages of the trade
workflow (pre- to post-trade), combined with the rich data that electronic processing delivers, allows
institutions to automate the most liquid, low-touch trades to free up traders’ time for larger, more
complicated trades.
At the larger end of the ETF trading spectrum, institutions are increasingly demanding block-sized
trades. This trend is mirrored in the success of over-the-counter request for quote platforms that
facilitate ETF trading, which have come to market in recent years. Previously, block trades were
handled through a combination of chat systems, traditional voice trading or algo connectivity with an
exchange. The emergence of the electronic RFQ has shaken up this dynamic. Whether interacting
directly with an RFQ platform or through an affiliated broker, institutions are becoming comfortable
embracing the RFQ process in ETFs for a couple of reasons:
• For institutions with legacy bond traders, the RFQ process is a comfortable ecosystem
compared to traditional algo-driven executions that are a mainstay of ETF trading.
• From a liquidity and immediacy perspective, for trades larger in size, firms prefer to have an
RFQ sent to multiple counterparties that have centralized books.
TABB Group research suggests that the largest, most sophisticated liquidity providers are still
considered front of the pack, while a select few bulge brackets such as Goldman Sachs and Morgan
Stanley have repositioned their ETF desks to be more multi-asset and thus are able to compete with
the natural risk and auto-quoting capabilities of top-tier liquidity providers.
Both Bloomberg and Tradeweb’s RFQ platforms have seen significant adoption recently. The choice
of one over the other is often a matter of which platform might — from an operations perspective —
mesh more cleanly with the firm’s technology systems such as its OMS. In terms of efficiency, a few
extra manual steps takes time, which is significant in the aggregate and counters the speed of
execution, which ultimately opens traders up to more operational error.
For example, Tradeweb, which launched its RFQ platform in early 2016, has consistently grown its
quarterly volume traded via RFQ. Full-year notional volume figures for the platform in 2017 totaled
$55.2 billion compared to $24.4 billion for the full prior year, a 126% year-over-year increase. Notional
volumes in 2018 through August have already surpassed full-year 2017 levels, with $58.8 billion in
notional executed through its platform (see Exhibit 12).
15
Exhibit 12: Tradeweb OTC RFQ Platform Volume Growth
Source: TABB Group, Tradeweb, Bloomberg
Similarly, Bloomberg has seen strong adoption of its RFQ offering. While total notional volume figures
are not available, on a percentage growth basis, a comparison of RFQ execution for ETPs on its
platform in the first quarter 2016 to the third quarter 2018 shows growth of more than 286% (see
Exhibit 13).
Exhibit 13: Bloomberg ETP RFQ Volume Growth
Source: TABB Group, Bloomberg
For fixed-income traders who are evolving their strategies to include more credit ETFs, the
emergence of a familiar trading protocol (RFQ) in the ETF trading ecosystem has been wind to their
sails. The equity market, however, has historically trafficked heavily in ETF blocks. According to
Goldman Sachs, equity ETFs represented between 10% and 15% of the consolidated tape 10 years
16
ago, and this share has more than doubled since then, with an estimated 30% to 35% of the tape
captured in ETFs.
Basket Flexibility
Looking to the primary market, tools that link ETF issuers and dealers have evolved to the point that
new opportunities for finding liquidity are opening up to the buy side. Bloomberg’s BSKT function was
first introduced to the market nearly four years ago as a means of affording ETF providers a means
to distribute create/redeem bond lists to their core dealer counterparties and authorized participants
(APs). There is also a reciprocal component in which dealers can send lists to providers if they are
looking to do a specific creation or redemption through the primary market. Linking this primary
market basket process with an electronic trading distribution channel and Bloomberg significantly
improved the efficiency of the process.
The evolutionary fork in this process came about when the BSKT functionality expanded beyond the
traditional in-kind creations and redemptions (pro-rata slices in which the underlying securities are
exchanged proportionately to the fund’s composition). Previously, only a select group of legacy ETF
issuers had the exemptive relief to allow their APs to exchange custom baskets of underlying bonds
in exchange for ETF creation units. Among other things, a rule that the Securities and Exchange
Commission proposed this past June (Rule 6c-11) supports, with caveats, expanding this exemptive
provision and allows a greater portion of the market to innovate within an ETF’s primary market
create/redeem process.
Tools such as Bloomberg’s BSKT expand the flexibility of custom baskets and the inherent limitation
that cash bond illiquidity creates. That is, for a hypothetical ETF in which there is a finite set of dealers
looking to utilize the create/redeem process in the primary market, there might be 75 to 100 bonds
actively trading in the market on a given day. The competition for these specific bonds among the
same set of active dealers leads to competition and unnatural inflation of the bond prices. On the
equity side of the market, however, creation and redemptions are easily done as perfect recreations
of the basket. Due to liquidity constraints within the underlying cash bond market, a portfolio manager
looking to do an ETF share creation may not be able to trade immediately in all the bonds within the
basket. The solution is to have the ETF issuer establish and distribute to its APs an equivalent basket
list that is a subset of bonds that are actively trading within the entire basket as an alternative creation
unit.
Innovative electronic platforms are linking dealers/APs with ETF provider trading desks in such a way
that providers’ portfolio managers can set custom filters such that a dealer can drop in their own
inventory or bid lists. The end result of this innovation is a streamlined process of determining what
will and will not work for the creation/redemption process, which effectively prevents the unfortunate
scenario of 20 dealers searching for the same small set of bonds.
17
Market leaders continue to push for evolution in the primary market ecosystem. This past August,
the Intercontinental Exchange announced that it is working with BlackRock to develop an open
architecture, primary market platform for ETFs that will be available industry wide. Looking to expand
the growing cross-asset approach that is being utilized by institutional investors, participants will be
able to access a centralized venue for create/redeem basket orders. The expanded availability of this
kind of flexibility within the primary market opens the door for entirely new avenues of liquidity with
respect to the ETF and underlying cash credit market. For dealers (and their clients in some cases)
a more efficient primary market tool for execution could ultimately lead to scenarios in which dealers
(or their clients) utilize the primary ETF create/redeem process as a means of converting bonds to
bond ETFs and trade out of the ETF into cash, which is the inverse of the much utilized process of
using ETFs as a quick tool for turning cash into credit exposure.
Conclusion
This growth represents an evolution in the application of the instrument from singular exposure to
versatile institutional tool. Broad-market exposure, functionality as a low-cost alternative to
increasingly expensive derivatives, and the ability to put money to work quickly were potential
applications for ETFs when they first launched decades ago. That is, their position in the market
today is a function of pure adoption rather than a change in design. This combination of growing
adoption among a diverse set of market participants and versatile market applications has created a
significant technological gap. Within this gap lies opportunity for true market structure evolution if the
tools supporting ETFs and underlying markets can coalesce.
Regulatory progress is also opening the industry to new, flexible rule sets such as SEC Rule 6c-11
and an eventual solution to National Association of Insurance Commissioners (NAIC) designations
that currently inhibit certain firms from utilizing ETFs. These changes will set the stage for a new
cadre of participants to evolve the trading landscape. This next phase in the market’s evolution will
require a new set of tools and analytical innovations to support the trade workflow ecosystem so it
will be accessible to firms outside the subset of today’s large, sophisticated ETF users.
Based on TABB Group outreach to the buy side, the biggest challenge facing firms that are beginning
to participate in the ETF/underlying (cash bond/derivatives) market is an efficient means of bringing
disparate data sources and execution workflows together efficiently. This demand for efficiency is
reflected in the proliferation of pre-trade/post-trade ETF trading systems to assist participants gauge
the final trading cost and liquidity (on- and off-screen) that are available to the market depending on
the ETF execution strategy being utilized (see Exhibit 14).
18
Exhibit 14: ETF Trading Strategies
There is a growing need for tools that can efficiently and intelligently put together disparate and often
incompatible ETF trade considerations (ETF on-screen liquidity, deviation versus the NAV, average
daily volume, NAV tracking error, estimated premiums or discounts versus the NAV, averages of the
premiums and discounts and — in the case of an RFQ — smart dealer groupings) such that any pre-
trade assumptions can be verified with minimal screen real estate and clicks of a mouse.
Looking ahead, the arrow of electronification points to a future of fixed income with considerably
fewer boundaries between one asset class and another or between disparate instruments of similar
exposure (ETFs vs. CDX vs. cash bonds vs. TRS). The education and utilization gaps in the
institutional landscape with respect to robust ETF trading is only temporary. Ultimately, institutions
that are deploying or exploring the use of ETF applications (outside of top-tier, sophisticated users)
are in a position to gain a significant first mover advantage through a deeper integration of third-party
tools with existing internal processes.
Mark Twain is often credited with saying that the secret of getting ahead is getting started. The first
step in optimizing workflow is challenging existing assumptions and recognizing opportunities for
improvement. The ETF landscape is at an inflection point at which the buy side has the most to gain.
There is an abundance of tools, often for little or no cost to the client, available to improve nearly
every stage of the pre- to post-trade process for the institutional ETF investor.
19
About
TABB Group
TABB Group is a financial markets research and strategic advisory firm focused exclusively on capital
markets. Founded in 2003 and based on the methodology of first-person knowledge, TABB Group
analyzes and quantifies the investing value chain, from the fiduciary and investment manager to the
broker, exchange and custodian. Our goal is to help senior business leaders gain a clearer
understanding of issues and trends within financial markets so they can better grow their businesses.
TABB Group members are regularly cited in the press and speak at industry conferences. For more
information about TABB Group, visit http://www.tabbgroup.com/.
TABB Group Fixed Income Practice

TABB Group’s Fixed Income research examines trading, operational and technology issues
impacting corporate bonds, treasuries, swaps, and other credit and rate derivatives in North America,
Europe and Asia. This includes deep dives on market structure, business models, execution venues,
central clearing, prime brokerage, technology, market data and compliance. Our research is used by
legislators, regulators and market participants worldwide to make strategic and policy decisions
surrounding fixed income trading and OTC derivatives reform.
The Author
Colby Jenkins, Analyst
cjenkins@tabbgroup.com
Colby Jenkins joined TABB Group in August 2012. Before joining TABB Group, he was a Global
Academic Fellow at New York University Abu Dhabi in the UAE. He graduated from New York
University, earning a BS in physics with additional focus on mathematics. As an analyst, Colby works
within both the firm’s consulting service and the fixed income research group.
.
20
www.tabbgroup.com | New York +1.646.722.7800 | London +44 (0) 208.133.5022

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Institutional ETF Trading 2018: The Tools Beyond the Tool | October 2018

Institutional ETF Trading 2018:

Exhibit 1: Investment Company ETF Net Assets

Source: TABB Group, Investment Company Institute

Exhibit 2: Institutional ETF Usage (Survey Result)

Source: TABB Group

Exhibit 3: ETF Net Assets Under Management by Underlying (Year-end 2017)

Source: TABB Group, ICI

Source: TABB Group, BlackRock

Market Structure 201

Exhibit 6: Institutional ETF Market Structure (edit colors etc)

Source: TABB Group, BlackRock

Exhibit 7: Primary and Secondary ETF Market Underlying Market Dynamic

Source: TABB Group, ICI

Thinking Outside the (Tool) Box

Exhibit 8: ETF Trading Tools Highlights

Relative Value Analytics OTC RFQ Protocols

Post-trade Analytics Order Routing/Execution Algorithms

Interpretive Exposure Analytics

Bond ETF Pricing/Volume Analytics ‘Custom’ Basket Trading

Source: TABB Group

Exhibit 9: Biggest Challenges Facing Derivatives Users Today (Cross-asset, by mention)

Source: TABB Group

Source: TABB Group

Exhibit 11: Comparative Quote Conventions

Instrument Quote Convention

Bond ETF Price

Source: TABB Group, BlackRock

The Algo, the Block and the RFQ

Exhibit 12: Tradeweb OTC RFQ Platform Volume Growth

Source: TABB Group, Tradeweb, Bloomberg

Exhibit 13: Bloomberg ETP RFQ Volume Growth

Source: TABB Group, Bloomberg

Exhibit 14: ETF Trading Strategies

Source: TABB Group, BlackRock

TABB Group Fixed Income Practice

www.tabbgroup.com | New York +1.646.722.7800 | London +44 (0) 208.133.5022

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