Getting Better Execution

Limit orders are fine. Stop orders, however, create some frustration for investors who thought having them would protect their investments. The election of these orders during the flash crash caused them some pain. While stop orders are still a valid order type, we encourage people to use extreme patience when executing orders during times of extreme volatility. Unless you know how a stop order works, I would advise you avoid them. Remember that there are stop orders (which turn into market orders when elected—be careful) and there are stop-limit orders (which turn into limit orders when elected —is your limit price relevant?). During the flash crash, most stop and stop-limit orders were elected and executed at levels the investors would have preferred to avoid.

What type of trading orders do you think advisors should be wary of and why?

There is a seemingly endless list of order types or algos [algorithms] available to advisors. Most, however, use only a handful. As stated earlier, be very careful when using market orders as posted liquidity is not always sufficient to fill your order. Also, when using VWAP [volume weighted average price] or POV [percentage of volume] algorithms, you need be aware of what your order’s participation will be for the duration of the order. For example, just because are targeting VWAP does not mean you are trading at optimal levels. If your order represents 50% of the volume over that period, expect to see significant price impact—something we continually seek to avoid.

Let’s suppose I need to make a $10 million trade in an ETF, how would a firm like WallachBeth help?

WallachBeth specializes in ETF execution and, more specifically, block execution. We first identify when the client needs to be completed with the order. With that we can determine the most efficient course of execution. We offer access to our deep network of ETF liquidity providers and market makers. We also give clients access to targeted real-time INAV pricing using the creation and redemption mechanism. Lastly, we have a suite of electronic execution routes that allow us to keep costs at a bare minimum. Using one or more of these avenues of execution allows us to get you the ETF exposure you want with the least amount of premium/discount to the index level. Minimizing the premiums and discounts on your execution is extremely important when seeking to avoid tracking error to the index. We believe we have the most efficient ETF execution model on Wall Street.

How do you think the services of market markers have evolved with the evolution away from floor trading to electronic trading?

Market Makers have evolved to “off-floor” trading remarkably fast and, in the process, helped make the markets more efficient. Unlike floor trading, market makers no longer know where “other” competitors are priced. They use sophisticated algorithms, pricing models, risk models and market access tools to make electronic bids and offers in ETFs. Because of the high level of competition and higher level of sophistication, they are often able to make bids and offers on ETFs with spreads of only a few basis points. Their expertise and volume in trading oftentimes affords them a lower cost than most advisors can obtain on their own. Despite the fact that some ETFs are “free” to trade, market makers have premium and discount built into their pricing models which gives them a chance to make a slight arbitrage profit on those trades.