Terry Flanagan

For institutional traders and their ongoing need for block liquidity, a comparatively new way to buy and sell exchange-traded funds is gaining traction.

Firms are increasingly eschewing traditional voice trading in favor of the electronic Request For Quote mechanism, where multiple prospective counterparties submit bids and offers for consideration. RFQ captures a fuller picture of market liquidity at any given time, reducing trade friction and streamlining workflows, according to Adam Gould, head of U.S. equity derivatives at trading-platform operator Tradeweb.

Adam Gould, Tradeweb

“When a client sends out an RFQ, there’s lot of variability in the pricing that comes back, and generally, the liquidity provider with the best bid is not the one with the best offer,” Gould told Markets Media. “Putting multiple liquidity providers in competition on an ETF trade is appealing to the customer because it results in better pricing.”

Tradeweb launched an RFQ ETF platform in Europe about four years ago and in 2016 added a U.S. platform, on which about $25 billion of notional volume across asset classes has been executed, Gould said. The average trade size is 125,000 shares, and transactions have been as large as 7 million shares.

“If liquidity is described as top of book, the very liquid ETFs that have traded in our platform have traded much larger size” compared with the national best bid and offer (NBBO), Gould noted. Less-liquid ETFs “have also traded substantially larger size, and at much better prices.”

Trading ETFs via electronic RFQ also can make for a much lighter lift for time-strapped traders, who previously would have to call around and/or visit various chat rooms in search of markets, and document all quotes as an audit trail to meet regulatory best-execution mandates.

“That is labor-intensive and subject to manual error, and the first price they get may be a stale price by the time they are ready to execute the trade,” Gould said. “Liquidity providers have different abilities to hedge at different times during the day, depending on where they have natural buyers and sellers and how their book is lined up.”

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