There has been an increasing incidence of new ETF issues being unable to come to market because no Market Maker sees to fit to put in for the allocation of the product.
The question is whether the lack of an interested Market Maker occurs because the prospective product has little or new merit or is there another possible explanation.
A quick analysis of the roughly 30 products that have launched in 2009 indicated that most have been fairly successful. The lack of interest in new products therefor would appear to be for other reasons.
Historically, Market Makers have provided the initial seed money to bring shares to market, much like an equity IPO. The reward for becoming the Lead Market Maker, or Designated Market Maker was a slightly larger liquidity payment on an electronic platform(ARCA or NASDAQ). If listed on the AMEX, prior to its sale, the advantage was that fewer Market Makers could easily trade no Specialist(LMM) products if the MM was also a Specialist on the AMEX.
With the demise of the AMEX floor, all ETFs are now traded totally electronically with the volume split between NASDAQ, ARCA and DirectEdge in descending order of volume. The net result is that there is little advantage to being a Lead Market Maker other than the 10 cent additional liquidity payment an LMM receives from ARCA. The risk is that the new issue will sell slowly resulting in the LMM having money tied up in seed with its consequent cost.
The result is that many Market Makers are telling Issuers that they will gladly trade their products if they sell quickly and show good daily trading volume but have little or know interest in tying up capital in seed.
The result is that good potential products may not make it to market hurting both Issuers and investors.
This situation has become compounded by the enforcement of an ARCA rule which requires an LMM to maintain certain levels of participation or losing the product and the additional liquidity payment. If the product is a slow grower the LMM gets to keep it with the consequent seed commitment. If after a short or long period of time the product becomes active and successful, the LMM who made the initial commitment runs the risk of losing the LMM designation and the liquidity payment kicker.
The response of the Market Maker-why provide seed? Just trade the ones that are successful with high volumes.
While visiting my mother this Easter Sunday, my siblings and I came upon a box of postcards which various family members had written and/or received while we lived in Switzerland between 1955 and 1961.
The first is from my brother Jeff, written to my parents. My brother and I were Swiss Boy Scouts(Eclaireurs Suisse). The program was run entirely by the scouts-no parental involvement. On longer camping trips we were accompanied by a young man in his early twenties-who also served in the Swiss Army.
Jeff was 12 or 13 at the time and I was 2 years younger.
Dear Family,
Yesterday we climbed a mountain which took about 6 hours round trip.We walked on snow and almost everybody got their
feet wet but me. We went swimming in a
shallow mountain pool full of freezing water. I swam naked. I stood naked in some snow. It was neat. I got your cards. Love Jeff.
Untold in the card was the fact that climbing the mountain(11,000 feet high) we had to climb down a snow cliff on ropes. The ropes didn’t quite reach the bottom of the precipice so we had to let go and slide the last 50 feet and were hopefully snagged by two of the older scouts who had climbing expertise and and descended a steep rock face.
When we read the various postcards even my practically mute mother laughed.
MY WIFE AND I FOLLOWED OUR NEWEST 4TH OF JULY TRADITION OF ATTENDING THE PARADE IN BATH, MAINE. THIS BEING AN ELECTION YEAR, BOTH NATIONAL PARTIES WERE WELL REPRESENTED. IT WAS AMUSING TO HEAR THE ONLOOKERS HECKLING THE REPUBLICANS WITH COMMENTS LIKE “GOOD LUCK IN NOVEMBER” AND SUCH. OF NOTE, THE REPUBLICANS WERE GENERALLY BETTER GROOMED THAN THE DEMOCRATS.
WE WERE SITTING NEXT TO A YOUNG COUPLE AND IN PASSING CONVERSATION WE FOUND THAT THE HUSBAND WAS PERMANENT CADRE IN THE MAINE NATIONAL GUARD. HIS COMMISSION WAS FIELD ARTILLERY (INFERIOR TO AN INFANTRY MOS) BUT TO HIS CREDIT HE HAD ATTENDED JUMP SCHOOL AT FORT BENNING AND BEING A PARATROOPER MADE HIM IN MY EYES.
WHILE WE PROBABLY WERE AT OPPOSITE ENDS OF THE SPECTRUM RELATIVE TO OUR CURRENT WAR, WE WERE BOTH STRUCK BY TWO OF THE GROUPS MARCHING (AND I USE THE WORD LOOSELY). THE FIRST WAS A LARGE GROUP OF NAVAL AVIATORS UNDOUBTEDLY FROM THE BRUNSWICK NAVAL AIR STATION. WHILE LOOKING SHARP IN THEIR UNIFORMS, THEY MEANDERED UP THE STREET IN NO PARTICULAR ORDER. WE BOTH COMMENTED THAT WE JUDGED SUCH GROUPS BY THEIR ABILITY TO MARCH IN STEP.
FOLLOWING SEVERAL GROUPS BEHIND WAS A MID SIZED GROUP CARRYING SIGNS SUPPORTING ALL THINGS GREEN AND FOR THE BETTERMENT OF THE ENVIRONMENT. INTERSPERSED IN THIS GROUP WERE MEMBERS CARRYING ANTI-WAR SIGNS,BAN THE BOMB ETC. THE NATIONAL GUARD OFFICER AND I BOTH COMMENTED ON THE ‘60′S LIKE LOOK OF THIS GROUP. LONG HAIR, BEARDS AND THE GENERAL LOOK OF A DISHEVELED MOB. THE COMMENTS OF THE ONLOOKERS WERE MILDLY CAUSTIC.
WHY IS IT THAT SUCH IMPORTANT ISSUES AS OUR ENVIRONMENT AND THE IRAQ WAR PROTESTS ATTRACT PEOPLE WHO SEEM TO BE ON THE FRINGE. WHERE ARE THE LAWYERS AND BUSINESS PEOPLE IN THEIR SUITS? OR ARE WE JUST TOO AFRAID OR TOO LAZY TO MARCH AND TO SHOW OUR TRUE FEELINGS?
On June 14th, I was asked to host the breakfast at the American Stock Exchange celebrating Flag Day and the 233rd Birthday of the United States Army. I was once again surprised by how few of my generation had served. There are only roughly 15 veterans of any of the services in an exchange population of almost 1000.
During the course of the breakfast and the roughly two hour visit, I was struck by the fact that there was a tremendous difference between how the current members of the Army and other services are being treated compared to my service time in the late sixties. As the Army representatives walked around the floor, they were cheered and thanked profusely for their service. Many members of the Exchange stopped trading in order to shake hands with the Army contingent. When I mentioned the warm response to the Lieutenant Colonel and the Command Sergeant Major, they both commented that the same thing happens in airports and even on the streets> While both were warmed by the welcome, they both expressed some embarassment. The command Sergeant Major had joined at the end of the Viet Nam Conflict and remembered how different those times were.
I related my experience returning home in 1969. Upon release from the Army in late May, I caught a plane from Seattle Tacoma Airport to Boston. My wife was about to graduate from Mt Holyoke College where she had finished her senior year while I was overseas. I was dressed in uniform with the bloused boots and Overseas Cap(known by another name) typical of US Army Airborne. Upon arrival on the Mount Holyoke Campus, I found my wife’s dorm. Walking up the front steps I encountered two young ladies. They proceeded to spit on me and call me a pig.
Whether one agrees with either the Viet Nam War or the present War in Iraq (and I don’t particularly agree with either), I am more than pleased that the bulk of the American population are supportive of those who serve. During the Viet Nam Era a large portion of those who served were conscripted. While I volunteered, those who were drafted didn’t deserve the abuse they took. They were simply doing their duty. The present military are mostly volunteers (the National Guard might be seen as reluctant volunteers ) and deserve our unqualified support.
Thank you to all who serve and thank you the American public who support them openly regardless of you view of the Iraq War. We are better for your support.
Greenhaven launched a new Commodity ETF last thursday. The symbol is GCC and it is based on the old CCI(Continuous Commodity Index). The Index has 17 commodities equally weighted. The bulk of the other Commodity based ETFs are heavily weighted with the energy sector. With 9000 shares on day one and 21,000 shares on day two it looks like a favorable launch.Van Eck launched a gaming ETF, symbol BJK. While not moving quickly the first two days it appears to be a product with some hope.On the Municipal ETF front there continues to be signs of success. After a relatively slow start, there is some growth in AUM in the Barclays, Powershares and State Street lists. Van Eck offerings have been slower but like the others national products they should gain some momentum.
Van Eck has joined the fray with their long term offering MLN. Typically the first day results were spotty but that has been the norm for new issues.All of the long term National Municipal ETFS have sold well and the seed money has been finished. Barclays MUB, SSGA’s TFI and Powershares PZA all continue to sell well and grow in assets. Of some interest is the fact that the NY and Calif Muni ETFS are starting to show some real movement. INY, and CXA from SSGA, NYF from Barclays, PZT and PWZ from Powershares are all showing a pick up in sales. Likewise SSGAs short offering of SHM has doubled its AUM and Powershares PVI(short VRDO) continues to show consistent sales and consequent growth. What was moribund in November has become lively in late December and early January. The yields still look attractive.
There has been an uptick in the volumes of the various Muni ETFs that have been issued by Barclays, SSGA., Powershares and Van Eck.
Of note yesterday were the 96,300 shares of MUB(Barclays natiional product) and the 201,000 shares of TFI(State Street national product). PZA from Powershares was third in share volume with 10,700 shares. All 12 existing Muni ETFs had some share volume.
There has been a flurry of late in the year launch announcements from several issuers. The timing is difficult as most specialists are trying to close out the year and are generally reluctant to take on new product with little chance of substantial sales until the New Year.
Finally the new launch calendar seems to be lightening up a bit. Barclays will launch a handful of products, SSGA only one or two, Van Eck one Muni product Vanguard-1Victoria Bay -1 and a smattering of others but definitely lighter than October/November. Hopefully this will give the market some time to absorb the recent spate of new issues.
Municipal ETFs, Oil 2, Timber
Published December 2, 2007 Exchange Traded Funds-Creation Leave a CommentMunicipal ETF volume topped 100,000 shares on friday. With the announcement of some kind of agreement coming from the Treasury and the financial world, we would expect an uptick in the Muni ETF volume this week. Volumes for friday:TFI 15,500<,PVI 5,300,SHM 6,300,PZT 1,300,PZA 14,500,NYF 2,800,CXA 1,800,MUB 43,300. It should also be noted that TFI(SSGA National Munis) had several creations this past week indicating that more than one seller was creating to cover short sales.FXP(ProShares China double down) had a fairly light day at 1,212,300 shares but has average daily volume of 1,323,070 shares daily on a very young product. CUT, the Timber product from Claymore and Andy Corn continues to show steady growth and should be an interesting play and grower over time.This week should bring US Oil2 from Victoria Bay. This is the second coming of USO with the difference being that the underlying is a 12 month strip of futures instead of USO front use of the front month future. The hope is that the strip will attract more sticky assets that Oil 1. On the near horizon in Vanguards EDV-an ETF based on zero coupon/strips on Treasuries. First to market and the halo effect of Vanguards sales effort and reputation should make this an interesting product.
Several new issues launched last week with very positive results. First out of the gate was ProShares FXP(double down China). Volume is hitting one million shares per day and there have been at least six more creation units jumping the assets under management sharply.
Powershares launched two products on thursday. PVI (VRDO-very short-money market type product-tax exempt). Volume totalled almost 100,000 shares for the two days. Spreads have been 2-3 cents wide. We would expect this product to grow steadily. Powershares also launched PHB(high yield) which has been less robust for the first two days of trading. The subprime and CDO credit issues undoubtedly have had an effect on sales of this product though longer term it has real promise.
Barclays launched AIA(Asia 50) on the ARCA platform on friday to a heartening first day volume of over 50,000 shares. This appears to be one of the more successful recent ARCA launches.
On the Muni ETF front, there appears to be a pickup in flow and an improvement in the bids on the ETFs and the muni market in general.
The coming week is slow in terms of new issues with a pick up during the following two weeks.
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