live etf trading workshop achieving best executions when trading etfs
DESCRIPTION
ETFTRANSCRIPT
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Live ETF Trading Workshop:
Achieving Best Executions
When Trading ETFs
Matt Hougan, Session Leader President of ETF Analytics, Global Head of Editorial IndexUniverse Ugo Egbunike, Session Leader ETF Analyst, IndexUniverse Cory Laing, Panelist Managing Director, Goldman Sachs Will McGough, CFA, Panelist Vice President, Portfolio Management, Stadion Money Management Thomas Smykowski, Panelist Head of Global Portfolio & ETF Execution, ConvergEx Group
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Session Leaders
Matt Hougan President of ETF Analytics, Global Head of Editorial IndexUniverse
Ugo Egbunike ETF Analyst IndexUniverse
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Will McGough, CFA Vice President Portfolio Management Stadion Money Management
Thomas Smykowski Head of Global Portfolio & ETF Execution ConvergEx Group
Cory Laing Managing Director Goldman Sachs
Panelists
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Part 1: The Basics In 5 Minutes
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Sell at Bid, Buy at Ask
Bid/Ask Spread
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Sell at Bid, Buy at Ask
Bid/Ask Spread
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Bid/Ask Spread
Impact
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Bid/Ask Spread
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Market Order: Buy 1000 Shares
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Market Order: Buy 1000 Shares
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iNAV = Indicative (or Intraday) Net Asset Value IOPV = Indication of Portfolio Value IV = Indicative Value (especially for ETNs)
Yardstick for the current Bid/Ask
The Beauty of iNAV
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SPY vs. iNAV
$149.00
$149.50
$150.00
$150.50
$151.00
$151.50
30/01/2013 9:30 04/02/2013 16:00Last Price iNAV
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Sometimes international markets over lap:
iNAV’s flaws in: International Funds
Bond Funds
Commodity Funds
and any other asynchronous things
…But not always:
The Crushing Horribleness of iNAV
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Market Hours Overlap: GXC
$67.00
$67.50
$68.00
$68.50
$69.00
$69.50
$70.00
$70.50
1/18/12 8:00 AM 1/30/12 4:27 PM
GXC Price
GXC iNAV
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Premiums/Discounts: EGPT
Protests begin January 25, 2011.
Egyptian Stock Exchange closes January 27, 2011
Mubarak resigns February 11, 2011.
Exchange reopens March 23, 2011.
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Trade
Elephants & Knotholes
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Trade
Bulls & China Shops
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What’s In An ETF Bid/Ask Spread?
Underlying NAV
Brokerage Fees
Market Maker P&L
Creation Costs
Forex Hedging Costs
Taxes
Bid Price
Ask Price
Market Maker P&L
Brokerage Fees
Taxes
Forex Hedging Costs
Redemption Fees
Underlying Bid/Ask
Spr
ead
ETF Spread
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Price Discovery: Best vs. Available 2-Sided Quotes are fine, but WHEN do you want to
trade?
Immediately?
Layout the position over the next few hours?
Days? Weeks?
How is my strategy affecting my price?
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Will McGough, CFA Vice President Portfolio Management Stadion Money Management
Every Basis Point Matters
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Stadion’s Execution Beliefs Best Execution is Strategy not Price
Multiple Strategies per Vehicle and Outlook Integration of PM and Trading Pre/During/Post Trade Monitoring
Adapt Trading Practices to Ensure Same Avg. Net Price Leverage Technology for Downstream Automation Step-In Challenges (non-discretionary)
Know Your Counterparty Strengths and Weaknesses Risk is Risk Disclosure – Documentation and Reporting
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The Keys to Trading ETFs Understand the fair value of the product you intend to trade.
Utilize the full arsenal of trade types when available.
Develop a relationship with your execution platform or
liquidity provider.
Do not undervalue the true cost of not paying attention to the execution of your ETF positions. Executing efficiently in the ETF markets is critical for the performance of your portfolios and can be easily achieved with a small amount of work. Source: Visual Guide to ETFs, David J. Abner. (173)
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Generating Short Term Alpha
0
0.2
0.4
0.6
0.8
1
1.2
1.4
100
102
104
106
108
110
112
114
Strategy EOD Strategy w/ Best Ex ST Alpha
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Cory Laing Managing Director Goldman Sachs
GS ETF Desk Capabilities
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Advisor Trends Impacting Trading Larger size Tougher tickers and more challenging parts of the
asset class spectrum More custodians and sub-advisory platforms
Order fragmentation
Greater reliance on risk and sell-side capital Advisors trade ‘at risk’ at a far greater rate than other institutions
Externalization of trading function Prohibitive step-out fees Historic under-resourcing on advisor trading desks
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Role of High Touch Broker Dealers Trading is the most likely bottleneck to continued
growth if strategy doesn’t evolve Not updating your process often results in:
Performance Slippage
Adjusting your investment process/security selection often results in: Broken Business Model
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Role of High Touch Broker Dealers Trading is the most likely bottleneck to continued
growth if strategy doesn’t evolve. So:
Either Change what you do: Modify investments Modify vehicles Swaps, notes, underlying portfolios, etc….
Or Change how you do it Trading
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There is no magic ‘best practice’ once size is achieved. Do the work, use the sell-side for more than just price and know your alternatives
Do the work, use the sell-side for more than just price and know your alternatives
Trading performance is determined far more by execution strategy than by sourcing prices
Role of High Touch Broker Dealers
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Role of High Touch Broker Dealers Dealers have massive infrastructures set-up to
provide execution advice: Pre-trade analytics Run scenarios on trading alternatives when transacting Granular breakdown of cost components:
Fixed costs Variable costs Risk factors and associated costs Behavioral costs
Transaction Cost Analysis (TCA) to help understand trading Alpha and behavioral patterns
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Role of High Touch Broker Dealers It is to your benefit to have dealer relationships
who understands your entire business Know how to:
Minimize order fragmentation Achieve client equitability issues Achieve & document best execution responsibilities
How to control information leakage: Formal leakage Detectable trading patterns that have the same effect
Cash Management How to keep you properly invested through a rebalance
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Pre-trade “strike” price
For example, mid-quote at order arrival
Execution price
Volume-weighted average if multiple executions
Post-trade price
Mid-quote 5 minutes after last execution?
Same day close?
T+1 to T+5 average?
Execution Quality Analysis
1
2
3
Execution price
Same-day closing price
Execution shortfall
ST-alpha capture
Short-term (ST) alpha
Price T+1 to T+5
1
2
3 Mid-quote 5-mins post
execution
After trade impact has subsided What is my trading cost?
What is my short-term alpha? What is my cost relative to my short-term alpha?
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Disclaimer ETFs are redeemable only in Creation Unit size aggregations and may not be individually redeemed; are redeemable only through Authorized
Participants; and are redeemable on an "in-kind" basis. The public trading price of a redeemable lot of the ETFs may be different from its net asset value. These ETFs can trade at a discount or premium to the net asset value. There is always a fundamental risk of declining stock prices, which can cause losses to your investment.
Some leveraged and inverse ETFs and ETNs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. They will
therefore realize each day a loss or a gain which is a multiple (for leveraged ETFs and ETNs) or the inverse (for inverse ETFs and ETNs) of the performance on that day of their underlying index or benchmark. For this reason, if they are held for a period longer than one day, their performance over such longer periods of time can differ significantly from the stated multiple of the performance (or the inverse of the performance) of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets. Prior to entering into a transaction in leveraged or inverse ETFs, you should be aware of the general risks associated with such transactions. You should not enter into leveraged or inverse ETFs transactions unless you understand the nature and extent of your risk exposure. You should also be satisfied that the leveraged or inverse ETFs transaction is appropriate for you in light of your circumstances and financial condition.
ETFs and ETNs that are linked to commodity futures do not offer direct exposure to the commodity’s spot price, and may perform differently than the
spot price for the commodity itself. Performance differential can be magnified if a specific condition persists in the market for a commodity that creates a disparity between near-term future prices and long-term future prices and may lead to unexpected performance results. Other factors, such as roll yield, transaction costs, management fees, and taxes may cause deviation in performance between the spot price of a commodity and commodity futures. You should not assume that an ETF or ETN that is linked to commodity futures will provide an effective hedge because of a negative correlation with equities or other asset classes. You should always be aware of the general risks associated with investing in the commodities market and the futures market before investing in an ETF or ETN that is linked to commodity futures.
© 2013 Goldman Sachs. All rights reserved.
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Thomas Smykowski Head of Global Portfolio & ETF Execution ConvergEx Group
ConvergEx ETF Execution
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Algorithmic Strategies Trade Size Liquidity Analysis Historical Spread and Volatility Average Volume Profile
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Block Execution Estimating Fair Value
Underlying Securities Creations/Redemption Fees Brokerage Cost (Commissions and Taxes) Slippage Risk (Hedging Costs) ETF Inventory Alternative Hedging Vehicles
Primary Market Versus Secondary Market Examples:
Side Ticker Fund ETY Type Shares Approx. Value
BUY SDOG ALPS Sector Dividend Dogs ETF US Equity 1,700,000 48,035,200$ SELL FVD First Trust Value Line Dividend Index Fund US Equity 2,700,000 49,237,200$
Side Ticker Fund ETY Type Shares Approx. ValueBUY/SELL VWO Vanguard FTSE Emerging Markets ETF International Equity 1,100,000 48,240,500$ BUY/SELL EEM iShares MSCI Emerging Markets Index Fund International Equity 1,100,000 47,762,000$
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ETF Rebalances Pre-Trade Analysis
(Opportunity Cost versus Market Impact)
Correlation and Exposure Trade Horizon
Side Ticker Fund ETY Type Shares Approx. ValueBUY PWV PowerShares Dynamic Large Cap Value Portfolio US Equity 430478 10,000,004$ BUY FDN First Trust Dow Jones Internet Index Fund US Equity 237478 9,999,985$ BUY FXH First Trust Health Care AlphaDEX Fund US Equity 279630 9,999,988$ BUY EWG iShares MSCI Germany Index Fund International Equity 402901 10,000,003$ BUY MOO Market Vectors Agribusiness ETF International Equity 181159 9,999,977$ SELL VTI Vanguard Total Stock Market ETF US Equity 77369 5,999,966$ SELL IYE iShares Dow Jones US Energy Sector Index Fund US Equity 135624 6,000,006$ SELL IYF iShares Dow Jones US Financial Sector Index Fund US Equity 92282 5,999,991$ SELL BIL SPDR Barclays 1-3 Month T-Bill Fixed Income 130989 6,000,017$ SELL STPZ PIMCO 1-5 Year U.S. TIPS Index Exchange-Traded Fund Fixed Income 110640 6,000,007$ SELL PLW PowerShares 1-30 Laddered Treasury Portfolio Fixed Income 187207 5,999,984$ SELL HYG iShares iBoxx $ High Yield Corporate Bond Fund Fixed Income 64586 6,000,039$ SELL EWJ iShares MSCI Japan Index Fund International Equity 798005 8,000,000$
Shares Approx. ValueBUY 1,531,646 49,999,957$ SELL 1,596,702 50,000,011$
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Disclaimers ConvergEx Group is a global technology firm. Its companies focus on providing software products and technology-enabled services in the
following areas: global execution, commission management, independent research, transition management, trade order management, portfolio margining and prime services. These businesses do not engage in market making, investment banking or “at risk” proprietary trading. When executing trades, one or more ConvergEx Group companies may operate in an agency, riskless principal and/or net trading capacity in search of liquidity for customers.
ConvergEx Group in the United States comprises ConvergEx Execution Solutions LLC (member NYSE/FINRA/SIPC); LiquidPoint, LLC (member
CBOE/SIPC); G-Trade Services LLC (member FINRA/SIPC); Westminster Research Associates LLC (member FINRA/SIPC); Eze Castle Transaction Services LLC (member FINRA/SIPC); ConvergEx Prime Services LLC (member FINRA/SIPC); Eze Castle Software LLC, RealTick LLC and ConvergEx Solutions LLC, of which Cogent Consulting, ConnEx, Jaywalk and LDB are divisions. ConvergEx Group, LLC is a subsidiary of ConvergEx Holdings, LLC.
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Part 3: Building a Price
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Cory Laing Managing Director Goldman Sachs
Building ETF Prices
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Breaking Down ETF Prices Behavioral factors
Trade ‘packaging’ Order fragmentation Follow-on flow Information leakage
Competitive bidding Predictability
Economic factors (Costs and Risk) Liquidity Volatility Tracking error of available hedges Stamp taxes, creation fees & hard friction costs Balance sheet and cost of capital Creation mechanism Underlying market norms and idiosyncrasies
ETF prices are determined by 2 main factors:
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The question too many people fail to ask is…
Do you actually want to pay
for all of this?
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Pre-Trade Portfolio Summary Trade Date: January: 30, 2013. For illustrative purposes only
For illustrative purposes only
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Pre-Trade Portfolio Summary Trade Date: January: 30, 2013. For illustrative purposes only
For illustrative purposes only
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Case Study For a Buy of XHB Correlated Assets
Hedge Optimizer
54% RTA1 46%XLY
9bps daily risk
6bps est. T-Cost
Source: Goldman Sachs Securities Division, Bloomberg. As of 1/31/13
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Case Study For a Buy of XHB Risk pricing and components:
Liquidity: 4cps (14.5bps)
Hedge: 1cps (3bps)
Risk: 2.5cps (10bps)
Friction: 0cps (0bps)
Counterparty ?
As of 1/31/13
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Pre-Trade Portfolio Summary Trade Date: January: 30, 2013. For illustrative purposes only
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Pre-Trade Portfolio Summary Trade Date: January: 30, 2013. For illustrative purposes only
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Case Study for EPP: Relativity Premium on EPP at 1:14PM: 0.11%
Source: Goldman Sachs Securities Division, Bloomberg. As of 1/31/13
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Case Study for EPP - Risk Exposures
Source: Goldman Sachs Securities Division, Bloomberg. As of 1/31/13
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Case Study for Sale of EPP Risk pricing and components:
Liquidity: 5.5cps (11.5bps)
Hedge: -1.5cps (-3bps)
Risk: 5cps (10bps)
Friction: 0cps (0bps)***
Counterparty ?
As of 1/31/13
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Case Study for Sale of BND Source: Goldman Sachs Securities Division, Bloomberg. As of 1/31/13
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Sample Transaction Costs:
Case Study for Sale of BND
As of 1/31/13
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Case Study for Sale of BND Risk pricing and components:
Pricing relative to NAV
ETF Liquidity: +3cps (+4bps)
Bond Liquidity: -9.5cps (-11.6bps)
OR
Risk: -3cps (10bps)
Friction (if redeemed): 1cps (1bps)
Counterparty ? As of 1/31/13
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IOO vs. EEM Source: Goldman Sachs Securities Division, Bloomberg. As of 1/31/13
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Disclaimer This message has been prepared by personnel in the Securities Division of one or more affiliates of The Goldman Sachs Group, Inc. ("Goldman
Sachs") and is not the product of Global Investment Research. It is not a research report and is not intended as such.
Non-Reliance and Risk Disclosure: This material is for the general information of our clients and is a solicitation of derivatives business generally, only for the purposes of, and to the extent it would otherwise be subject to, §§ 1.71 and 23.605 of the U.S. Commodity Exchange Act. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any specific action based on this material. It is for the general information of our clients. It does not constitute a recommendation or take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The material is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only and only represent the views of the author and not those of Goldman Sachs, unless otherwise expressly noted.
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Not a Fiduciary: To the extent this material is provided to an employee benefit plan or account subject to the Employee Retirement Income Security Act of 1974 or Section 4975 of the Internal Revenue Code, this material is provided solely on the basis that it will not constitute investment advice and will not form a primary basis for any person’s or plan’s investment decisions, and nothing in this material will result in Goldman Sachs becoming a fiduciary or advisor with respect to any person or plan. To the extent this material is provided to any other recipient, this material is provided solely on the basis that the recipient has the capability to independently evaluate investment risk and is exercising independent judgment in evaluating investment decisions in that its investment decisions will be based on its own independent assessment of the opportunities and risks presented by a potential investment, market factors and other investment considerations.
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Disclaimer
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Disclaimer written consent. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law, you
(and each of your employees, representatives and other agents) may disclose to any and all persons the U.S. federal income and state tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind.
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Special Risk Disclosure related to Exchange-Traded Funds ("ETFs") and Exchange-Traded Notes ("ETNs"): To the extent this communication contains information pertaining to ETFs or ETNs, consider the investment objectives, risks, and charges and expenses of the ETFs and ETNs carefully before investing. Each U.S. Registered ETF and ETN has filed a registration statement (including a prospectus) with the SEC which contains this and other information about the ETF or ETN as applicable. Before you invest in an ETF or ETN, you should obtain and read carefully the prospectus in the registration statement and other documents the issuer has filed with the SEC for more complete information about the product. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, you may obtain a copy of the prospectus for each of the ETFs and ETNs mentioned in these materials by (i) contacting your Goldman Sachs sales representative, or (ii) sending a request by calling toll-free 1-866-471-2526, or (iii) sending a request by email to [email protected], by fax to (212) 902-9316, or by mail to Goldman Sachs, 200 West Street, NY, NY 10282, Attn: Prospectus Department.
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Disclaimer ETFs are redeemable only in Creation Unit size aggregations and may not be individually redeemed; are redeemable only through Authorized
Participants; and are redeemable on an "in-kind" basis. The public trading price of a redeemable lot of the ETFs may be different from its net asset value. These ETFs can trade at a discount or premium to the net asset value. There is always a fundamental risk of declining stock prices, which can cause losses to your investment.
Some leveraged and inverse ETFs and ETNs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. They will
therefore realize each day a loss or a gain which is a multiple (for leveraged ETFs and ETNs) or the inverse (for inverse ETFs and ETNs) of the performance on that day of their underlying index or benchmark. For this reason, if they are held for a period longer than one day, their performance over such longer periods of time can differ significantly from the stated multiple of the performance (or the inverse of the performance) of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets. Prior to entering into a transaction in leveraged or inverse ETFs, you should be aware of the general risks associated with such transactions. You should not enter into leveraged or inverse ETFs transactions unless you understand the nature and extent of your risk exposure. You should also be satisfied that the leveraged or inverse ETFs transaction is appropriate for you in light of your circumstances and financial condition.
ETFs and ETNs that are linked to commodity futures do not offer direct exposure to the commodity’s spot price, and may perform differently than the
spot price for the commodity itself. Performance differential can be magnified if a specific condition persists in the market for a commodity that creates a disparity between near-term future prices and long-term future prices and may lead to unexpected performance results. Other factors, such as roll yield, transaction costs, management fees, and taxes may cause deviation in performance between the spot price of a commodity and commodity futures. You should not assume that an ETF or ETN that is linked to commodity futures will provide an effective hedge because of a negative correlation with equities or other asset classes. You should always be aware of the general risks associated with investing in the commodities market and the futures market before investing in an ETF or ETN that is linked to commodity futures.
© 2013 Goldman Sachs. All rights reserved.
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Will McGough, CFA Vice President Portfolio Management Stadion Money Management
Pair Trading & Execution Strategy
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Pair Trade - Sell 1M EEM to buy 700k IOO
.93 @ .94 Trades .93
.90 @ .02 Trades .965
.95 @ .07 Trades .02
VWAP Avg Pr .97
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Pair Trade - Selling 8mm EWJ to 2mm DXJ
… about 50% crosses, 13 bps tracking daily, spreads in the stocks are a bit wide, but adv is only about 2.5%, so very liquid on both sides…
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DXJ -- Dec 13, 2012
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DXJ -- Last 5 Trading Days
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Traded 10% on risk @ .62
Traded 5% on risk @ .97,.15
Average Price = 55.8357 5,104,034 Shares No Impact, didn’t trade on Secondary Combination Basket/Futures/2ndary Strategy Beat VWAP of Day, VWAP during Window and Close
Multiple Leg Strategy
Worked 20% from 10-11 ~55.76avg
Worked 40% from 11-12 ~55.77avg
Worked 20% from 12-130
~56.013avg
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Trading Covers All Situations Small Lots (<10k) – Algo Destinations
Small Blocks (10k-50k) – Agency Liq Agg, Prop/Bal Sheet Providers
10k TUR, 50k FEMS
Med Blocks (50k-300k) – Agency Liq Agg, Prop/Bal Sheet Prov, Banks 250k IJR, 100k AGZ
Big Blocks (300k-1mm) – Agency Liq Agg, Prop/Bal Sheet Prov, Banks
500k VTI, 750k XRT, 500k EWZ,
Mega Blocks (1mm++) – Negotiated 5mm XLI, 4mm IEFA
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Part 4: Live Trading
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Thank You. Questions?
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Live ETF Trading Workshop:
Achieving Best Executions
When Trading ETFs
Matt Hougan, Session Leader President of ETF Analytics, Global Head of Editorial IndexUniverse Ugo Egbunike, Session Leader ETF Analyst, IndexUniverse Cory Laing, Panelist Managing Director, Goldman Sachs Will McGough, CFA, Panelist Vice President, Portfolio Management, Stadion Money Management Thomas Smykowski, Panelist Head of Global Portfolio & ETF Execution, ConvergEx Group