You can say, “Ok, I’ll buy those,” and you will be buying the 25,000 shares at $50.15, or you can say, “No, thanks,” and hang up the phone. OR you can say, “I’ll pay $50.10 for 25,000 shares.” At this point the liquidity provider making the market has a choice: sell to you at the lower level, counteroffer at a level in between (maybe at $50.12) or—and this is the potential risk—move their offer higher. Again, this is rare; if the provider is unwilling to negotiate, they will likely reiterate their first offer.
We recently had a client situation that demonstrated how this process can result in significant cost savings in ETF executions. The client was a buyer of several hundred thousand shares of a WisdomTree ETF. They called their platform execution desk and asked for a market. The desk reached out to a liquidity provider, and the client was shown an offer that was eight cents above the offer quoted on the screen, albeit for a small size. At that moment the difference between the quoted offer and the offer for the larger size seemed too big for the client, so they said, “No, thank you,” and then called the WisdomTree capital markets team. We have a strict policy of not getting in the middle of price negotiations between our clients and our liquidity providers.
We leave the pricing of funds up to the professionals who are actually going to be offsetting risk, and we respect their judgment tremendously. However, we do perform sanity checks and help clients understand the rationale behind some of the pricing they may be seeing. In this case we advised the client to show a counterbid. The client called back with a slightly lower bid for the shares. The level was acceptable, and the trade was executed at four cents above the quoted offer. (This all happened in the span of two minutes, so the market had not moved.) The client saved approximately $16,000 on the execution and, even more important, felt comfortable with the price they were paying. And the liquidity provider got to make the sale, which is their goal. Everyone was happy.
Now you can add the price negotiation tool to your own execution tool kit. It’s not going to help you all the time, and sometimes it won’t be needed at all. But it’s a powerful weapon to know that the business of pricing large blocks and the prices those trades take place at are negotiable.
The content of this post is relevant to institutional investors interested in trading ETFs in significant size. Individual investors do not have access to liquidity providers to trade ETFs, regardless of volume, as referenced in the content below.