It’s surprising to me how many investors in significantly sized blocks of ETFs agree to trade at whatever price is offered to them. Essentially, it’s the equivalent to walking into a car dealership, without doing any price research, and paying sticker price.
However, like a car dealership, the block trading market in ETFs, where liquidity providers make markets in large size to the advisor community, is a negotiable marketplace.
It’s important to clarify that I’m focusing on large trades, typically blocks of more than 5,000 or 10,000 shares. In smaller-size trades (5,000 shares or fewer), order flow typically interacts with order flow electronically and trades are filled (or not) based on supply and demand. However, in large block trades, investors are often trading against an ETF liquidity provider, usually by phone. In this case, if you have a block of ETF shares to execute, in many ETFs you would be well served to call a liquidity provider to get a market in the fund, so you can trade the whole block at once.
If you’re an advisor, and you work on a platform, your execution desk will likely have contacts at a variety of ETF liquidity providers, and they may call on your behalf to get bids and offers for your block trade. So if you have 25,000 shares to buy in a particular ETF, you can call your execution desk and ask them to get you a “market” in that particular fund. What you are asking is for the execution desk to reach out to a liquidity provider and come back to you with a bid and an offer for 25,000 shares.
The two obvious choices you have when your execution desk comes back with a market are 1) trade at the price offered, or 2) don’t trade at the price offered. However, what many investors do not realize is that there is a third option: You can negotiate against the offer. This requires some knowledge about the fair value of the fund and carries the risk, albeit rare, that the given offer may be rescinded. Here’s an example: Say, your desk or provider quotes you a market of $50.05 bid and offered at $50.15.