Many ETFs Languish. Virtu Wants to Get Paid to Help Fix That

Discussion in 'Wall St. News' started by ajacobson, Oct 18, 2017.

  1. ajacobson

    ajacobson

    The murdered the stock today based on comments about the "low volatility" environment.


    Many ETFs Languish. Virtu Wants to Get Paid to Help Fix That
    By
    Annie Massa
    October 18, 2017, 4:00 AM CDT
    • Obscure rule bans key traders from receiving cash directly
    • Highlights ad-hoc nature of ETF regulation as assets swell


    Virtu Financial Inc.’s billion-dollar purchase of KCG Holdings Inc. this year more than doubled the size of its business that smooths trading of exchange-traded funds.


    Now, armed with extra clout, the New York-based high-speed market maker has a 20-year-old U.S. rule in its sights. If the Financial Industry Regulatory Authority revises its Rule 5250, Virtu contends, it can help solve a pervasive problem in the industry by breathing life into small ETFs. About 24 percent of U.S. funds saw less than $100,000 traded each day on average in the past year, according to data compiled by Bloomberg.


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    The regulation bars traders from getting paid by public companies for buying and selling their stocks -- something designed to prevent conflicts of interest. ETFs are covered, too, but Virtu argues they shouldn’t be.


    “Current rules restrict issuers from directing incentives to the products that need the most support,” Doug Cifu, Virtu’s chief executive officer, said during an interview. It would be a more straightforward, level playing field for new entrants if issuers could pay their lead market makers directly and disclose the arrangements, he said.


    Virtu is one of a handful of firms that makes markets in ETFs, helping to ensure investors can buy or sell them when they want to. With its KCG deal complete, Virtu leaped to become one of the largest ETF shepherds with extra responsibilities -- called “lead market makers” -- in the U.S. equity market, with more than 500 funds in its purview. Although overseeing trading for high-volume ETFs is a business that pays for itself, it’s less economical to take on that crucial role for products that limp along with low volume.

    Read More: Old Wall Street Is Losing the War Under the Surface of ETFs

    Along with New York-based Cantor Fitzgerald LP, another ETF market maker, Virtu argues that traders would be more inclined to support small, new funds if ETF issuers could pay them -- arrangements that are already possible in Europe. The U.S. ETF industry’s low barriers to entry and limited incentives to delist, even for funds that don’t trade much, have led to a glut of products with limited assets and trading volume.

    kickbacks” when announcing an investigation in August.

    “When an incentive is tied to trading volume, it’s misaligned,” said Phil Bak, CEO of ACSI Funds and Exponential ETFs. His firm’s products include the $41 million American Customer Satisfaction Core Alpha ETF, which usually only sees a few thousand shares traded each day. “The industry wants to see those incentives aligned.”

    Now the pressure’s on to convince the regulators of the same.