With the Securities and Exchange Commission’s ETF Rule coming into effect in December 2020, many exchange traded funds will have the opportunity to use custom creation/redemption baskets for the first time. Custom baskets confer several advantages including the flexibility to use baskets of securities that fit both the fund’s portfolio management goals and the market maker’s inventories and trading interests. At the same time, custom baskets involve risks that must be carefully managed. In this report, we give a market maker’s view on the trade-offs presented by custom baskets for both fixed income and equity ETFs.

As volatility churned higher in the first quarter, we received an influx of questions about the mechanics of ETF creation and redemption. In this primer, we highlight the differences between pro-rata, custom and cash creation/redemption, and give our perspective as a market maker on the strengths and weaknesses of each method.

The sheer variety of exchange-traded funds, and their unique liquidity and risk characteristics, have led traders to develop a variety of different execution strategies. Some of them tend to work better than others depending on the ETF and the circumstances of the trade. In this report, we discuss the strengths and weaknesses of the most popular ETF execution strategies, and how traders can use the size of the trade and their execution urgency to guide their decision about which strategy to use.

As assets in credit ETFs have grown, some market participants have asked whether credit ETFs might negatively impact trading in the underlying bonds in a stressed market environment. In this report, we share our views on this topic as an ETF market maker and bond dealer. We argue that while credit ETFs will become more costly to trade in a stressed market, they don’t pose a systemic risk to the credit markets.

In January, the SEC approved the Twelfth Amendment to the Limit Up-Limit Down plan, as well as a handful of separate rule filings that will further harmonize how the exchanges handle a LULD trading pause. The centerpiece of these changes is a new framework for the exchanges’ reopening auction collars. In this piece, we give some context around the Twelfth Amendment and illustrate how the new collars will work.

In this document, we explain the origins of LULD, catalogue some of the important events that have shaped its evolution, and opine on the various proposals to improve it. At the end, we illustrate how LULD works in a two-page cheat sheet.