x Days of Isolation – Day 09: ETFs – Expect to Trade for Free?Mark Montgomery
by Mark Montgomery, big xyt
Day 9 – ETFs, Expect to Trade for Free?
We saw how volatility during February and March resulted in an unsurprising widening of equity spreads. It sparked our curiosity to see how ETFs were affected during the same period. Market makers in ETFs base their pricing on the underlying instruments. These instruments are not limited to cash equities and may be structured to provide investors with exposure to baskets of Fixed Income instruments or Commodities as well as cash equities. The chart today shows ETF spreads grouped by underlying asset class (Equities, Fixed Income & Commodities) for around 2500 instruments quoted on Euronext Paris, one of the largest & most liquid European venues. We were struck by two notable observations. Firstly, that whilst spreads in Cash Equity, & Commodity based ETFs increased to a peak of around 4 times their normal levels, the Fixed Income based ETFs saw their spreads widened by a factor of 10 at the peak.
Secondly, there was a “second wave” for Commodity ETFs where we saw spreads widen far more than they did initially as oil flirted with technical negative pricing at the end of April.
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On our x Days of Isolation
During these unprecedented times we do not underestimate the professional and personal challenges that everyone is facing. There are far more important things to be doing in the community than looking at a screen.
However, data and data analytics is playing a critical part in providing solutions to the current global crisis. Furthermore, the markets remain open and whilst they do, the trading community needs to be well informed in order to understand the changing market landscape. As a result, big xyt is receiving an increasing number of requests for observations of changing trends and behaviours in the equity markets. We are excited to have recently expanded our London team to enrich our content and support for clients seeking greater market insights from an independent source. Whilst many adjust to the new experience of working from home we plan to share some of these thoughts, observations and questions in the coming days & weeks.
As ever we welcome feedback as this can shape further contributions from our team and the Liquidity Cockpit our unique window into European equity market structure and market quality.
We hope you enjoy them.
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