Liquidity Lies In Tradition

Terry Flanagan

Despite the soaring popularity of exchange-traded funds, options on ETFs and in some cases, the actual underlying are subject to wide bid/ask spreads. It will take time to increase familiarity with some products so that spreads tighten and more traders and market makers get involved.

But until the masses begin using a lightly-traded product, it is up to trading and execution desks with a focus on ETFs to provide adequate liquidity and keep them active.

“It is possible that after options are listed on some ETF products that volume in the options may be light or the bid/ask spreads will be somewhat wider than more seasoned options that have traded on the market for a few years,” Paul Weisbruch, vice president of ETF and options sales and trading at Street One Financial, told Markets Media

“However, this does not change the liquidity characteristics that are present in these ETF products by their initial design, and simply just reinforces how crucial it is for ETF and ETF options investors to rely on seasoned ETF trading desks and liquidity providers in ensuring that they are getting a fair shake when executing their trades,” added Weisbruch.

Some execution desks like WallachBeth Capital specialize in ETFs, helping spread order flow over several different venues and helping customers achieve best price in ETFs that are low volume.

“If you look at many of the larger ETF providers, as their products reach critical mass from an ETF standpoint in terms of healthy daily average trading volume and robust asset growth, listed options is often the next step in the progression,” noted Weisbruch.

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