This week we sit down with Dana Martin at WallachBeth to discuss the company’s support of the active ETF market.
WallachBeth is a leading provider of institutional execution services to institutions including ETF issuers and their clients. What is the most common way you engage with ETF issuers and how has your business evolved over the last decade?
WallachBeth is fortunate to have multi-dimensional relationships with issuers, executing transactions within ETFs and of ETFs – that is, we trade the underlying components (primarily equities, options, ETFs) and we also facilitate execution of the ETFs themselves on behalf of our clients.
On the ETF side, WallachBeth’s core business is block execution for ETF consumers such as wealth management firms, ETF strategists and asset owners such as insurers or banks. It’s a point of pride that issuers often refer us to their clients and help expand our reach in terms of that trading activity. We work to earn those referrals by cultivating strong relationships with capital markets and trading teams, and they trust that we understand the product and that execution can be a significant component of their client’s return. The work we do trading within the funds for issuers aligns and informs the work we do trading the ETFs, and vice-versa.
For those that are less familiar, how is your role as an agency-only trading firm different from that of a registered market maker (RMM) or lead market maker (LMM)?
This is a great question – we’re often talked about as a market-making firm. In fact, we were flattered one year to win an industry recognition, “ETF Market-Maker of the Year.” Ironically though, we’re not actually a market-maker. So, I want to unpack that distinction.
A “market” exists where there is a buyer and a seller for a given asset – so market-making literally means ensuring that a market participant can find the other side of a trade. An LMM publicizes a two-sided quote “on screen” for an ETF so market participants know the price at which they could buy or sell that ETF. But as an agency-only trading firm, WallachBeth is not taking the other side of our clients’ trades, or making a market for the asset they are buying or selling. We are not set up to take the other side or provide principal liquidity; instead, we intermediate and provide access to liquidity. Instead of quoting and providing a market like a market-maker does, on behalf of our clients we navigate the market that is being offered. We aggregate liquidity in the context of specific transactions – our job is to evaluate the markets offered across venues, counterparties and trade strategies in order to structure execution based on the clients’ goals.
There is no liquidity without market-making, simply put, and it’s a complex, risk-driven activity that no two market-making firms approach in the exact same way. Thus, it’s very important for WallachBeth to maintain strong, collaborative relationships with the market-makers so we understand which firms are most competitive, engaged and efficient in certain market areas. We are here to help our clients travel on a fast-moving two-way street, and appreciating and understanding market-making is the essence of how we get good, consistent results for our clients.
As you are assessing trading and business opportunities with new ETF sponsors, what criteria do you most often look to? Do these criteria vary by asset class and/or by management style (active vs. passive)?
One gratifying part of our role and reputation is that clients often approach us in the early innings of product development to talk about everything from operational nuances to sales strategy. It’s interesting and great to say that at this stage in the ETF game, there really isn’t a typical profile of an ETF issuer. We work with issuers of all sizes with very unique stories and investment emphasis. That variety has accelerated over the last few years with traditional active managers getting in the game and as the market sees massive demand for solution-oriented products (i.e., the derivative ETF boom).
We try to get managers thinking about whether their investment strategy can be maintained in a wrapper that is being continuously priced/ traded/ created/ redeemed, as ETFs are. Regulatory and market structure progress has occurred really quickly in order to support a big variety of approaches and underlying exposure, but that said – just because something is technically doable in an ETF, that doesn’t mean it can be done efficiently in an ETF.
The active ETF market has grown meaningfully over the last five years. How has WallachBeth approached the change and are there any areas of the market that you are particularly focused on?
The ETF specialization at WallachBeth was established in 2008, very directly in response to the evolving needs in ETF execution after the products first moved to electronic venues. Our strategic plan as a business is simply to evolve with the market and our clients, so whether it’s technology, personnel or operations, our approach is a function of what issuers and their clients need. For example, we have spent a lot of time in the last couple of years helping issuers evaluate the very specific trade flow and clearing infrastructure that enables derivative-based ETFs.
As a trading firm, what guidance would you provide sponsors as they consider expanding their product offer to include actively managed ETFs?
There are so many factors that go into whether investment IP can be successfully commercialized as an ETF but distribution expectations have been reframed in a way that makes the “success” definition much more attainable for traditional managers. A few years ago, most prospective issuers were looking at ETFs as a bet on new distribution channels (e.g., Robinhood retail), hoping to go “viral ” in the way that Cathie Wood’s ARK lineup did. Unfortunately, those stories are rare and in those retail segments it’s tough to test demand for the types of strategies run by traditional active managers.
Today though, most are now looking at ETFs as a way to deepen reach within existing distribution or extend into related channels. For example, there may be demand for an ETF on a wirehouse platform where the manager is successfully selling their mutual fund or SMA. As another example, a consultant who has approved a strategy in SMA form for their institutional clients may be interested in an ETF for their private wealth clients. Situations like that have managers reconsidering the risk/reward outlook for launching ETFs in a positive way. It used to be, “should we do an ETF? If we do an ETF, will anybody care?” but now it’s “we need to do an ETF – can you help us think through it?”
