Thursday, April 2, 2015

ETF Trading Basics

Now that our ETF is out we have been getting a lot of questions about how to trade ETFs.  Here are some basic guidelines:

1. Volume has nothing to do with liquidity--The ability to trade an ETF has nothing to do with volume, it is all based on the liquidity of the underlying basket.  

2. Know the fair value of the ETF when you want to trade it---Quote systems only show the last trade, so if the ETF last traded at 10am and you want to place a trade at 3pm the price you see will be old.  A better way to gauge the value of the ETF is either looking at the Indicative Value (you will need some sort of advanced quote screen for this), or the bid/ask spread, which can be found on Yahoo Finance.

3. Try to avoid trading during the first and last 15 minutes of the trading day--During the open in takes market makers a bit to figure out the prices of all the underlying securities in an ETF.  During that time bid/ask spreads are likely to be wider.  At the end of the day you can see a lot of order imbalances that can also impact spreads.

4. Try to avoid market orders---Market orders put you at the mercy of the market, you are better off placing limit orders.  We can help you decide where to place your limits.

5. Call your block desk on trades over 5,000 shares---Larger trades are better facilitated through your custodians block desk.  They will reach out to various market makers and come back to you with the best price.

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