So if you’re an advisor, the capital markets team would see either where you’re custodied or who you work for. For instance if you’re Morgan Stanley advisor, you would be connected with their trading desk, and if you’re an RIA custodied with Charles Schwab, the capital markets team would connect you with Schwab’s centralized trading desk.
“We work together to assess the liquidity capacity of the ETF, and by that I mean, firstly, I tell all the advisors and all of our investors never judge an ETF by the average daily volume,” Rausch said. “It’s hugely misleading and it’s just plain wrong. You have to look at the underlying liquidity.”
What many ETF investors don’t realize is that an ETF’s true liquidity is based off its underlying assets. Even if an ETF’s daily trading volume is low, the ETF’s underlying assets may include companies like Apple (NasdaqGS: AAPL) or International Business Machines (NYSE: IBM) that have robust liquidity. Consequently, an ETF provider’s capital markets team may be able to work with a custodian to tap this underlying liquidity and help investors execute efficient trades.
“We’re going to work with your trading desk and what you’re coming out of to get a fair price,” Rausch said. “What I mean by that is if you present this package to the market making community, you’re going to get a cheaper price because the market maker is going to have a natural, albeit, imperfect hedge, and reduced risk in trading equals cheaper prices.”