ETF TRADING An overview of the ETF market & Tradebook ETF solutions

CONTENTS

02 THE RISE OF ETFs03 CHALLENGES OF ETF TRADING: A CASE STUDY05 TRADEBOOK ETF SOLUTIONS: ANONYMITY & LIQUIDITY

THE RISE OF ETFsExchange traded funds (ETFs) have had a phenomenal run in recent years, with both their number and assets under management (AUM) growing dramatically. Globally, the total AUM in ETFs has grown more than sixfold over the past decade to $2.9 trillion, with net sales of European ETFs jumping 55 percent last year.1 Their unique characteristics attracted investors in the high interest rate environment of the early 2000s and have become even more attractive in today’s low-yield, regulatory-focused environment. Following are key characteristics that have contributed to their exponential growth.

TRANSPARENCYETFs make their portfolios publicly available daily; this has a host of benefits, from eliminating style drift to creating the basis for an arbitrage that keeps the trading price close to fund value.

EXCHANGE LISTING: STANDARDIZATION & LIQUIDITYThe key advantages of exchange listing are standardization, liquidity and intra-day trading. Standardization provides a tremendous benefit to holding multi-asset portfolios within the same account structure. Listing a product on an exchange and creating a standardized format provides access to a wide variety of market participants and increases liquidity to a level that could not have previously been achieved. This has also helped to decrease trading spreads.

TAX EFFICIENCYDue to their in-kind creation and redemption process, the delivery and receipt of ETF shares into and out of a portfolio is not considered a taxable event.

LOW FEESETFs have considerably lower expense ratios compared with their mutual fund counterparts, allowing fund managers who run diversified portfolios to quickly add or remove exposures.

1 Financial Times, “86% of Active Equity Funds Underperform,” Madison Marriage, http://www.ft.com/intl/cms/s/0/e555d83a-ed28-11e5-888e-2eadd5fbc4a4.html

CHALLENGES OF ETF TRADINGDespite the rapid growth in assets under management in ETFs, some of the most misunderstood aspects of ETFs are their trading and liquidity characteristics. A study by Greenwich Associates highlighted that liquidity/trading volume is one of the most significant factors that institutional investors consider when selecting an ETF. Some of the challenges to trading ETFs occur when:

- Displayed bid and ask on the secondary market have lost relevance in ETFs

- Displayed size on the secondary market has lost relevance in ETFs

- ETF trading volume does not equal ETF liquidity

The last point is particularly important. ETF liquidity is available in two varieties — the on-screen “displayed liquidity” and the underlying “basket liquidity.” It is the underlying liquidity of the ETF that is the right measure to look at when trading an ETF. This is perhaps most critical when assessing what portfolio size to build and what ETFs to include within the portfolio.

ETF TRADING // 02

The desk at BBVA Suiza SA was having difficulty sourcing liquidity in ETFs. They wanted to trade ETF blocks because of the lower market impact, less information leakage and typically better execution price, however, they were forced to trade in smaller sizes in the lit market where liquidity is very sparse. They also had no choice but to deal directly with a set of liquidity providers, which was a disadvantage due to adverse price selection for their smaller quantity.

CHALLENGES OF ETF TRADING: A CASE STUDY

Additionally, BBVA was only able to see one quote at a time from the market maker with whom it had a relationship. To compare the actual prices for the ETF and place the order, the only option was to go to each individual venue, which was time-consuming and inefficient.

BLOOMBERG TRADEBOOK ETF RFQ SOLUTIONWhat got the attention of BBVA Suiza was Bloomberg Tradebook’s ETF RFQ (Request for Quote) solution, which anonymously sources and aggregates ETF liquidity from a diverse set of liquidity providers. The RFQ platform understands that the ETF marketplace is fragmented and that much of the available liquidity is not yet on the exchange. Liquidity is provided on-demand by a set of niche liquidity providers that most institutional clients cannot access directly; the Bloomberg RFQ platform offers complete anonymity.

Tradebook’s ETF RFQ platform is a unique solution that aggregates liquidity from different providers via a single platform. Since the two-sided quotes are aggregated through Bloomberg Tradebook, the liquidity provider does not know who is requesting the quote or vice versa, eliminating the possibility of preferential treatment and therefore helping the end user achieve better execution results.

“ Low-cost exchange traded fund market has grown more than sixfold over the past decade, to $2.9Tn2”

“ Sourcing liquidity is one of the greatest challenges institutional investors face when trading ETFs3”

2Financial Times, “86% of Active Equity Funds Underperform,” Madison Marriage, http://www.ft.com/intl/cms/s/0/e555d83a-ed28-11e5-888e-2eadd5fbc4a4.html3Greenwich Associates 2015 U.S. Exchange-Traded Funds Study

“ We weren’t able to get quotes at all. We tried to trade some ETF blocks, but in order to find liquidity for higher-volume orders, we had to trade them over a longer period of time, which risked that the market might move against us,” said Marco Cadalbert, head of desk at BBVA Suiza. “We needed to get them done more quickly whenever possible.”

- BBVA Suiza SA

- Headquartered in Zurich

- Private Bank

- $5.1 billion AUM

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For BBVA, which was already using Tradebook to trade equities, the implementation was seamless as ETF RFQ is fully integrated with existing Bloomberg functionality and no additional set up was required. After testing the platform, BBVA was pleased with the breadth of available liquidity, anonymity and efficient workflow provided.

BBVA IMPROVES ETF TRADING EFFICIENCYWith Bloomberg Tradebook’s ETF RFQ solution, BBVA is now able to trade ETFs in larger sizes and get the block liquidity it had been seeking, for both U.S.- and European-listed ETFs without impacting the market. The desk experiences less information leakage, enjoys better prices and has a more streamlined trading experience — all of which have helped improve best execution.

EXCHANGE

AGGREGATED QUOTESANONYMITY

BLOCK LIQUIDITY

REQUEST FOR QUOTE

PROVIDER 1 PROVIDER 4

PROVIDER 2 PROVIDER 5

PROVIDER 3BBVA Suiza uses Tradebook ETF RFQ to anonymously source ETF block liqudity from multiple liquidity providers.

“ ETF RFQ has helped eliminate market uncertainty from our trading process. There are very few times we wouldn’t use it,” Cadalbert said. “Best execution comes down to an issue of timing. With the instant quotes, we are now able to get things done soon after the orders are received and execute in a timely manner, ensuring the best price.”

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The changing ETF trading landscape prompted Tradebook to enhance its ETF offering for both the U.S. and Europe. Based on client demand, our tools have been optimized to better tap into ETF liquidity.

Anonymity is the key to successful ETF trading. Through Bloomberg Tradebook, clients can source live ETF blocks electronically. Your identity and transaction details will remain completely anonymous to the ETF liquidity providers.

TRADEBOOK ETF SOLUTIONS: ANONYMITY & LIQUIDITY

ETF RFQThe Tradebook ETF RFQ (Request For Quote) functionality anonymously sources block liquidity from multiple providers.

To initiate a request for quote, pull up a single-security ETF on BMQ <GO> (Tradebook’s front end) and select the “RFQ” button.

After entering the block quantity, the RFQ is sent to a diverse set of market makers who return two-sided quotes.

You can then either accept or decline the bid or offer to complete the trade.

1

1.

2

2.

3

3.

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EMSX RFQE Bloomberg Tradebook is now a counterparty on Bloomberg’s EMSX RFQE multi-broker platform, providing access to streaming quotes for trading ETF blocks through ETF RFQ. Tradebook’s ETF RFQ provides anonymous access to Europe’s top ETF market makers for equity, fixed income or commodity ETFs — all through Tradebook’s single counterparty.

To initiate an ETF block request for quote from the RFQE <GO> screen, simply select Bloomberg Tradebook as the counterparty and fill in the ETF and block size. The RFQ is immediately sent to a unique set of multiple market makers who return two-sided quotes. The best bids or offers will then be displayed and can either be accepted or declined to complete the trade. Prices from the market makers will continually update until a price is acknowledged by the trader. Tradebook’s RFQ will go out anonymously to a minimum of four market makers, but traders can also select other counterparties to send RFQs to. RFQE shows the trader’s request in a banner at the top of the screen with a real-time market-depth monitor that includes cumulative totals.

SMART ETF ALGORITHMBloomberg Tradebook’s Smart ETF algorithm was specifically designed to seek price improvement in the highly liquid U.S. ETFs. This algorithm is recommended when trading less than 1% of ADV.

EXECUTION ALGORITHMSIn a situation when the trader has a specific benchmark, such as VWAP or arrival price, or wants to execute within certain target volume participation, Tradebook’s full suite of algorithms can be used to trade ETFs. All algorithms are optimized for ETF trading.

ETF TRADING // 06

SOLUTIONS SUMMARY

RFQ RFQE SMART ETF ALGO

EXECUTION ALGORITHMS

About Actionable streaming quotes

Actionable streaming quotes

Algorithm that seeks price improvement in U.S. ETFs

Standard execution algorithms (benchmark)

Access BMQ <GO> RFQE <GO> BMQ <GO> BMQ <GO>, EMSX, All third-party, OMS/EMS

Markets All listed ETFs All listed ETFs U.S.-listed ETFs only

All listed ETFs

Use When Trading more than 1% of ADV

Trading more than 1% of ADV

Trading less than 1% of ADV

Seeking target volume participation rate

BEST EXECUTIONPre-TradeTradebook’s Strategy Analyzer (STAZ <GO>) uses quantitative models and actionable statistics to provide guidance on an asset’s trading behavior in order to help traders implement the right algorithm for a stock or list, both pre- and in-trade.

Pre-trade analytics from Strategy Analyzer (STAZ <GO>) provide actionable statistical guidance on execution strategies. With an estimated cost of executing using a suggested strategy (1), including the number of days required to trade a larger order (2), a trader can make a decision to trade a block with a known price and market impact now or use a strategy to execute over a period of time.

Strategy Analyzer (STAZ <GO>)

The ETFs, INAV and implied liquidity data

1

2

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Post-Trade Full order handling transparency is provided in the order details and transaction logs, including the ETF-relevant benchmarks ArrivalINAV and LastFillINAV. Bloomberg Transaction Cost Analysis (BTCA <GO>) delivers interactive pre- and post-trade analytics with the same ArrivalINAV and LastFillINAV ETF benchmarks captured by the order logs.

Full audit trail and TCA

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Bloomberg Tradebook® is a leading global agency broker that provides anonymous direct market access (DMA) and algorithmic trading to more than 125 global liquidity venues across 43 countries. With unique tools and unrivaled standards of execution, we seek new ways to deliver value to both the buy side and sell side.

ABOUT BLOOMBERG TRADEBOOK

ETF TRADING // 09

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