Comments on: How Liquidity Relates to ETFs and the Markets

By: Tom Lydon

Tom Lydon — Tue, 28 Aug 2007 18:47:40 +0000

The liquidity the Fed injects in the system is to help keep the money flowing. Some investors may see bargains in the market. Markets are efficient in the sense that not everyone invests the same way or has the same feeling about a situation. While some may find this is a time to avoid investing, others might find it the perfect time. With more money flowing in the system, it gives that extra incentive to buy.

By: Paul Hess

Paul Hess — Tue, 28 Aug 2007 09:59:31 +0000

I find that ETF’s often have massive liquidity just outside the bid/ask, presumably from brokers or MM’s hoping to arbitrage off the extra penny(s) in spread, and perhaps can create/redeem at fair market value to realize their profit (or perhaps just hedge by trading the underlying stocks or options). In any case, this feature gives the ETFs far greater liquidity and depth than a simple look at the trading volume would imply.

By: terry

terry — Mon, 27 Aug 2007 16:26:12 +0000

I’m with the Full Timer question who’s throwing what where, after all it’s not just ETF’s it’s supposedly the whole market.

By: Mike Castino

Mike Castino — Mon, 27 Aug 2007 16:02:38 +0000

Tom,
Great to see an article on ETF “liquidity”.
ETFs can also be created and redeemed at NAV (plus applicable fees). Stocks do this via the IPO process. ETFs have an “ongoing IPO” process that allows investors to create and redeem shares when needed. Yes, this is for larger investors due to creation/redemption unit size. However, further education on this type of liquidity would be a great topic for you to write about.
Thanks,
Mike

By: Full Timer

Full Timer — Mon, 27 Aug 2007 14:47:07 +0000

This still seems to gloss over the issues. So if the Fed pumps up the money creating liquidity how does this reduce the bid/ask spread? In order to increase the bid price, someone must be throwing money at the ETF that nobody wants. Who is doing this with the Fed money?