Question 1

Education

Accepted Answer

Educating clients on how to assess implicit and explicit liquidity in a fragmented ecosystem

The vast majority of ETF trading occurs off the primary exchange on dedicated MTF platforms like Tradeweb or Bloomberg RFQE.
Explicit liquidity is fragmented by multiple share classes listed on different exchanges in various currencies.
Nevertheless implicit liquidity of the wrapper is huge as the liquidity of the hedge drives the liquidity of the ETF.
Market makers can hedge ETFs with the underlying constituents, futures and other ETFs.

Question 2

Advice

Accepted Answer

Advising clients on whether to trade on risk or versus NAV and the trade-off between an arrival price and NAV benchmark

Different execution strategies each have their individual pros and cons.
The cost and liquidity components associated with each style are fundamentally different.
We educate clients in great detail on how the NAV is computed and how the cost of replication will drive the ETF bid-ask spread for our clients.
FI ETF NAV trading in particular requires an in depth understanding of the valuation methodology employed by each index sponsor.
How do you assess a fair price in a universe where over 90% of bonds do not trade every day?
For risk trading the ability to hedge and its associated cost will drive the delta risk premium charged to clients via the bid ask spread.
We explain to clients how OTC spreads change intraday according to hedge availability across asset classes.

Advising clients on how to access liquidity via the ETF wrapper and its expected cost

Efficient trading of ETFs requires embracing technology (trading via a MTF), employing competition in the dealing process (RFQ) and on-boarding new counterparts (proprietary market making firms).
Proprietary market makers not the traditional investments banks are the biggest players in ETFs with a market share for risk trading of over 70%.
The ETF Capital Markets team regularly produces pre-trade and post-trade analyses for clients giving colour on best counterparts to trade with, expected OTC spreads, etc..

Question 3

Information

Accepted Answer

Providing information on flows in UBS ETFs

UBS ETF primary market activity.
UBS ETF secondary market activity across MTFs, exchanges and via the SI regime.

Question 4

Opportunities

Accepted Answer

Directing clients to liquidity pools

Identifying matching opportunities for clients with OTC Liquidity Providers (both investment banks and propriety market making firms).

Question 5

Where are ETFs traded?

Accepted Answer

Multi-lateral Trading Facilities. The most popular are Bloomberg RFQE and Tradeweb.
On-exchange. UBS ETFs are currently traded on the following stock exchanges: Borsa Italiana, Euronext Amsterdam, London Stock Exchange, Mexican Stock Exchange, SIX Swiss Exchange, XETRA.
Systematic Internaliser regime. Bilaterally over the counter versus your broker.

Question 6

How does the ETF Capital Markets help in the assessment of liquidity for an ETF?

Accepted Answer

Assessing liquidity of UCITS ETF can be challenging as the picture is one of fragmentation.
Over 80% of UCITS ETF trading (across all providers both by notional and tickets) occurs off the primary listing on exchange via dedicated RFQ MTF (Multi-lateral Trading Facilities) platforms including Tradeweb and Bloomberg RFQE. Simple ADV metrics may not include this explicit liquidity.
Liquidity of an ETF sub-fund is often fragmented by multiple share classes (ACC/DIS/HSC) listed on different exchanges in many currencies. Therefore, only considering the liquidity of one share class or listing to be indicative of the sub-fund is "incorrect".
Even more importantly, ADV does not consider implicit liquidity. Implicit liquidity means the liquidity the MM can generate by considering the ETF itself, the underlying constituents, futures or other ETFs as the hedge to an ETF trade. Please consider the following example.
An ETF tracking the S&P500 that never trades. It has zero explicit liquidity but still billions of dollars of implied liquidity as you can hedge large orders with S&P 500 futures. Indeed, MMs can use futures, the underlying constituents or other ETFs as a hedge.
You can apply this logic for FI ETFs too. Through the in kind negotiated creation redemption process APs create liquidity by delivering stratified samples of the index according to duration, credit, sector, country and specific risk. The beauty of the ETF wrapper is it is as liquid as the hedge the MM can utilise.
Clients should consider the explicit liquidity of the ETF (i.e. the ADV of the ETF shares themselves) as well as the implicit liquidity of the ETF (i.e. how much could be traded by assessing the hedge alternatives).

Question 7

What are bid/ask spreads?

Accepted Answer

The bid/ask spread for ETFs is the difference between the prices quoted by market makers either OTC or on exchange for a certain transaction size. Intraday bid ask spreads for risk trading are a function of the following factors:

The size of the transaction.
The primary market spread for the ETF
The Market Maker’s confidence in the iNAV computation for the ETF.
The availability of hedges.
The delta hedge risk spread for the hedge selected by the Market Maker.
The Market maker's ETF inventory.
The Market maker's exposure inventory.
The Market maker's risk factor view.

Question 8

What is OTC trading?

Accepted Answer

Over-the-counter (OTC) or off-exchange trading is trading in ETFs directly between the client and their broker dealers. Commonly this is conducted on dedicated platforms called Multi-lateral Trading Facilities (MTFs). MTFs are dedicated trading venues, analogous to an exchange, who employ a Request For Quote methodology for trading. The most popular MTFs are Tradeweb and Bloomberg RFQE.
Clients select multiple brokers and request a 2-way Quote on Risk and trade with the counterpart offering the best price via a competitive auction. Implicitly the client’s benchmark is the arrival price, i.e. the current bid ask price, using this methodology. Clients can trade 24/5 via this strategy assuming the MTF is open and dealers are quoting. Please reach out to the ETF Capital Markets team for an indication of potential OTC spreads and the broker dealers to include in your RFQ.
Tradeweb and Bloomberg RFQE also allow clients to trade versus NAV. Clients select multiple brokers and request a 2-way Quote versus NAV and trade with the counterpart showing the tightest spread to NAV via a competitive auction. Clients can specify the NAV date they are targeting and the settlement they would like. Explicitly the client’s benchmark is the NAV price using this methodology. When trading versus NAV clients need to be aware of Fund cut off times, Fund holidays, Market holidays, etc. which can be requested from the ETF Capital Markets team.

Question 9

Who is allowed to subscribe in a UBS ETF?

Accepted Answer

Dedicated trading entities (commonly global investment banks and proprietary market making firms) who have signed an Authorised Participant Agreement are allowed to create and redeem ETF units in the primary market versus NAV against the Fund Sponsor.

Question 10

What is an Authorised Participant?

Accepted Answer

An Authorised Participant is a dedicated trading company who has signed an Authorised Participant Agreement that allows them to create and redeem ETF units in the primary market versus NAV against the Fund Sponsor. Authorised Participants (APs) are generally global investment banks and proprietary market making firms. Only APs can trade in the primary market versus the Fund. Clients trade in the secondary market against broker dealers (APs, MMs, etc.) either on risk or versus NAV.

Question 11

Who are our partners?

Accepted Answer

Competition is key in the dealing process and we have a deep pool of Authorised Participants ready to provide liquidity to clients either OTC or on exchange.
Our APs consist of the major investment banks and proprietary market making firms.

Partner list master

Question 12

What different ways are there to trade ETFs?

Accepted Answer

There are several different ways to trade ETFs:

Risk Trading via Multilateral Trading Facilities:

Clients trade directly on MTFs. MTFs are dedicated trading venues, analogous to an exchange, who employ a Request For Quote methodology for trading.
Clients select multiple brokers and request a 2-way Quote on Risk and trade with the counterpart offering the best price via a competitive auction.
Implicitly the client’s benchmark is the arrival price, i.e. the current bid ask price, using this methodology.
The most popular MTFs are Tradeweb and Bloomberg RFQE.
In addition, many of the Exchanges offer RFQ Facilities including Borsa Italiana – BTS RFQ, SIX – Quote on Demand, Xetra Enlight, etc.
Clients can trade 24/5 via this strategy assuming the MTF is open, and dealers are quoting.

NAV trading via MTFs:

Clients select multiple brokers and request a 2-way Quote versus NAV and trade with the counterpart showing the tightest spread to NAV via a competitive auction.
Explicitly the client’s benchmark is the NAV price using this methodology.
When trading versus NAV clients need to be aware of Fund cut off times, Fund holidays, Market holidays, etc. which can be requested from the ETF Capital Markets team.

Trading via the SI regime

This involves trading with Investment Banks or Proprietary Market Makers directly and off an official venue. A good example is trading bilaterally via IB Chat on Bloomberg.

On-exchange trading

Trading directly on the listed stock exchange.
UBS ETFs are listed on many exchanges around Europe in multiple currencies with both hedged and unhedged share classes.

Question 13

How does ETF trading work?

Accepted Answer

Often there can be confusion between the primary and secondary market for ETF trading.
Clients trade off or on exchange in the secondary market with various Liquidity Providers including Authorized Participants, Official Market Makers and Inter-Dealer Brokers.
Clients trade in the secondary market on risk or versus the NAV benchmark.
In the primary market only Authorized Participants can trade versus the ETF Provider.
APs trade versus the NAV benchmark according to certain conditions as detailed in the AP Agreement which governs trading in the primary market.
Clients generally never trade versus the ETF provider directly.

Secondary market

Clients trade off or on exchange with market participants including investment banks and proprietary market making firms. Trades are either on risk or versus NAV.

Source: UBS Asset Management, April 2024.

Primary market

Creation/redemption of ETF units between authorized participants and the Fund. Trades are only versus NAV.

Question 14

How do you calculate a NAV Spread?

Accepted Answer

Physical replication

Execution commissions to purchase the underlying stock.
Financial Transaction Taxes applicable on the purchases of the underlying stock where relevant
Stamp duty applicable on the purchases of the underlying stock where relevant.
Sell Taxes applicable on the sale of the underlying stock where relevant.
Custody fees applicable on the ETF primary market transaction.
FX spreads for multi-currency and currency hedged ETFs.
Capital Gain Taxes applicable on sale of the underlying stock where relevant.

Synthetic replication

Swap entry/exit fees.

Question 15

How do you calculate a Risk Spread?

Accepted Answer

The secondary market spread builds on the components of the NAV spread.

In addition one needs to consider the following:

Confidence in the iNAV computation.
Delta hedge risk spread of the underlying stock.
Delta hedge risk spread of the FX.
Market maker's ETF inventory.
Market maker's exposure inventory.
Market maker's factor view.

Question 16