10 Billion Served: The Unsung Role of an ETF Market Maker
Nov 29, 2018
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The podcast discusses the important role of ETF market makers in providing liquidity for popular and lesser traded ETFs, comparing it to the smooth functioning of a machine. They also explore the rise of Susquehanna, a renowned market maker in the ETF industry, and how poker skills have been applied to financial markets. The process of creating and redeeming ETF shares is explained, along with the revenue and margin of ETFs compared to mutual funds. The speakers also touch on marketing strategies and upcoming events.
Market makers ensure smooth trading and provide liquidity, making ETFs less prone to attacks and concerns.
Smaller proprietary firms have successfully filled the void in ETF market making and provide liquidity for less actively traded ETFs.
Deep dives
Market making and its role in the ETF world
Market making is like the oil that keeps the machine running in the ETF world. Market makers provide liquidity and ensure smooth trading by constantly buying and selling ETF shares. Over the years, market makers have facilitated trillions of dollars' worth of trades, with only a small fraction resulting in trade-related issues. This reliability and efficiency are why ETFs are less prone to attacks, criticism, and concerns.
Susquehanna: A renowned market maker
Susquehanna is a highly secretive and independent proprietary market maker in the ETF world. Founded before the inception of ETFs in the US, Susquehanna has become one of the largest market makers globally. They focus on options trading and have honed their skills by applying decision-making techniques from poker to financial markets.
The role of small prop firms in ETF market making
Smaller proprietary firms, like Susquehanna, have stepped in to fill the void left by investment banks in the ETF market making space. These firms trade with their own capital and have been successful in providing liquidity to a wide range of ETFs, especially those that are less actively traded.
The process and technology behind market making
Market making requires sophisticated technology and data analysis. Market makers utilize pre-trade analytics and constantly monitor information on ETFs and their underlying securities. By understanding the prices, ingredients, and liquidity of ETFs, market makers can efficiently provide fair prices and execute trades rapidly.
There’s been roughly 10 billion individual ETF trades in the past 25 years with almost no issues. This McDonald’s-esque track record of happy customers is one of the reasons ETFs have become so popular. One of the main reasons behind the stellar track record of trading is the important role played by ETF market makers, who provide liquidity for popular ETFs but also lesser traded ones— stepping in to be a buyer or a seller when there are none.
On this week’s Trillions, Eric and Joel speak with veteran ETF market maker Chris Hempstead of Deutsche Bank as well as Annie Massa of Bloomberg News, who just wrote about the secretive market maker Susquehanna in the latest issue of Bloomberg Markets. The discussion covers ETF mechanics, liquidity, and poker. Yes, poker.