Tagged: RBC

Hired ETF Guns

I dare you.

Ever say that as a kid? “I’ll give you a dollar if you—” (fill in the blank)

Last week the SEC approved a plan by the NASDAQ for sponsors of ETFs trading less than a million shares daily – 93% of ETFs – to pay $50,000-$100,000 annually to market participants if they dare to trade any of these ETFs more aggressively.

We opposed this plan because it allocates dues and fees specifically, not equitably as the Exchange Act requires, and it promotes statistical arbitrage – trading securities for spreads. That’s harmful to buy-and-hold investors and the issuers who seek them out.

The NASDAQ argued – successfully – that stimulating trading in weak ETFs unattractive to automated market-makers will shrink spreads, boost volumes and benefit investors.

Yesterday at TABB Forum, a news site for the trading community hosted by influential consultancy the TABB Group, Stephen Bain from RBC Capital Markets wrote a piece called “The Hidden Cost of Tighter Spreads.” RBC studied trading before and after spreads between the best prices to buy or sell tightened through decimalization and automated market-making.

Bain wrote: “Our initial analysis documents a marked increase in short-term price gyrations for individual stocks, which have effectively doubled from pre-2000 levels to present. This finding represents a significant increased cost for investors – entirely contrary to claims that lower execution costs now prevail.”

We arrived at similar conclusions. The average US stock has Total Intramonth Volatility (TIV) of roughly 40%, calculated by subtracting the low price from the high price each day, dividing by closing price, then tallying those over 20 trading days. (more…)