As we wrap up the first quarter of 2020, I hope you, your families and colleagues are staying safe and healthy. If you live with or know healthcare workers and first responders, please extend our gratitude for their tremendous efforts to fight the spread of COVID-19.
The New York Stock Exchange has temporarily shifted to an all-electronic trading model following the temporary closures of our equities and options Trading Floors in New York and San Francisco. The NYSE ETF business team is largely working remotely and we remain fully available via phone, email and video conferencing. As we experience historic levels of volatility, our team is working with issuers, liquidity providers and investors to ensure orderly trading and provide updates and education via broadly-distributed industry calls.
In the first quarter, ETFs continued to demonstrate value as both investment vehicles and price discovery mechanisms during times of market stress. An area that garnered media and market attention was bond ETFs, as many traded at discounts to their NAV strike prices quoted at the end of each trading day. This sparked many discussions about why this occurs and raised the concept of bond pricing and fair value. We see this as an opportunity for the ETF industry to educate investors, trading firms and the broader media about how securities are priced and how some aspects of price measurement –such as fair-valued NAV – can be different than real-time price discovery. Across broader asset classes such as equities, commodities and currencies, ETFs continue to be a reliable source of price discovery throughout this crisis. It’s also encouraging to see ETFs continue to garner their share of overall industry inflows.
Amidst these extraordinary circumstances, the growth opportunity in the ETF industry hasn’t diminished. The NYSE remains in active discussions with current ETF issuers and new industry asset managers concerning new opportunities and product development. Active, non-transparent ETFs continue to be top of mind, especially as the first of these products are beginning to launch. If you haven’t already, please contact our team at [email protected] to discuss how we can support this or any aspect of your business planning.
Find our Q1 2020 report below, which we hope will provide you with valuable insights on current market conditions and key business and regulatory updates. As always, reach out to us with any thoughts or questions. In the meantime, please stay well.
Douglas M. Yones, ChFC®
Head of Exchange Traded Products
New York Stock Exchange
Record Market Volatility
Uncertainty around the coronavirus crisis has corresponded with unprecedented volatility and trading volume in the U.S. equities market. In March alone, there were eight consecutive trading sessions in which the S&P 500 closed up or down 4% from the previous day’s close – and this happened during 13 different trading days in March. To put this in context, prior to 2020 the markets only moved this much in 10 different trading days over the past decade. Year-to-date, the Dow Jones Industrial Average has recorded 14 separate 1,000-point moves, which had only occurred three times prior to this year. In the first quarter, we also saw three of the five largest volume days ever in terms of shares traded on U.S. equity markets.A considerable amount of this heightened activity took place in ETF trading. The average daily value of U.S. ETF transactions was $165.13 billion for the quarter, which is six times greater than the fourth quarter of 2019. Average daily volume of shares traded more than quadrupled from Q4 2019 to 2.6 billion shares. These numbers continue to demonstrate that investors turn to ETFs during times of market stress in order to access diversification, asset allocation and multiple layers of immediate liquidity.
NYSE Goes Fully Electronic
On March 23, the NYSE took the historic step of initiating fully-electronic trading, temporarily closing the Trading Floors for our flagship equities exchange and two options markets as the nation fights the spread of the coronavirus. It’s the first time in the 228-year history of the NYSE that the market is open for business while our Trading Floor is closed. For further insight on this decision, read the NYSE President Stacey Cunningham’s LinkedIn post and listen to NYSE COO Michael Blaugrund’s recent Inside the ICE House podcast.
The transition has been relatively seamless as our systems continue to handle the volatility and volume as designed. Last month saw record highs in messaging traffic across all NYSE Group platforms, peaking at 329.4 billion messages in a single day. NYSE Arca alone saw a record 1.56 billion orders on March 3. The smooth operation of all our markets amidst such volatility is a testament to the resiliency of our Pillar platform, to which all NYSE equities exchanges migrated last year.
An analysis of our electronic auction quality with the all-electronic NYSE Floor has shown a small uptick in price volatility. This was anticipated, though NYSE market quality continued to outperform competing electronic markets. The NYSE remains firmly committed to reopening the Trading Floor – as soon as it is safe to do so – in order to restore the highest-performing market model: the combination of human market makers and cutting-edge technology.
Active, Non-transparent ETF Update
During this time, we remain in discussions with current and future licensees as they develop active, non-transparent products. To prepare the ETF ecosystem for the NYSE AMS methodology and other non-transparent active solutions, the NYSE created a market maker consortium of six liquidity providers to receive daily basket files for the NYSE’s hypothetical non-transparent large cap growth active ETF, $NYSEAMS and its proxy, $NYSEAMSP. This coalition is using the files to build trading models and provide live feedback on the proxy-based ETF solution. We shared an update last month that demonstrates the tracking remains tight through extreme market conditions, as illustrated in the below chart.
The NYSE remains excited about the growth opportunity that active, non-transparent ETFs promise for the industry, as outlined in a recent LinkedIn post from Douglas Yones. Please contact our team to learn how we can support your business’s active strategy.
Multiple Volume Records for ICE ETF Hub
ICE ETF Hub continues to grow and add value to the market by simplifying the process for ETF creation and redemption. During the month of March, ICE ETF Hub more than doubled its orders, with Authorized Participants processing a record total of $87 billion in notional value through the platform, as compared to $27 billion in February 2020. ICE ETF Hub welcomed Goldman Sachs as an AP on the platform in March and has plans to launch support for the assembly of custom baskets and US-listed international equity ETFs later in 2020.
Inside ETF Interviews on WealthManagement.com
We enjoyed kicking off 2020 and catching up with the ETF community at Inside ETFs in January. Thanks to everyone who stopped by the NYSE studio and participated in our interview series – the videos are now live on WealthManagement.com to view and share.
The NYSE is continuing to produce our NYSE Floor Talk and What’s the Fund shows remotely while our Trading Floor is temporarily closed. Reach out to our team if you’re interested in filming a segment.
Generic Listing Standards for ETFs Reliant on SEC Rule 6c-11
The SEC approved NYSE Arca Rule 5.2-E(j)(8) to establish generic listing standards for ETFs that are permitted to operate in reliance on Rule 6c-11 under the Investment Company Act of 1940. This helps open the door to future product development by allowing 6c-11 compliant ETFs to list generically instead of filing a subsequent rule change, thus reducing the time frame and cost to come to market.
Relief for 1933 Act ETPs
The SEC has adopted a rule that modernizes securities registration fee payments for ETPs registered under the 1933 Securities Act. By extending the 1940 Investment Act guidance to these ETPs, issuers will now be able to register an indefinite number of shares and pay fees on an annual basis. We commend the SEC for enabling this harmonization that streamlines the registration process for new products coming to market.
Since the beginning of the coronavirus spread, we’ve brought you the latest information on the medical front and other areas through a series of interactive conference calls. We’ll continue to hold these webinars throughout April so please keep an eye out for invitations via email or reach out to [email protected] for an update on the schedule.