The “Home of ETFs” has put on an addition.
Over the last two years, the New York Stock Exchange, a unit of Intercontinental Exchange, has attracted more than 30 exchange-traded funds to the NYSE floor. Traditionally handling ETFs on its all-electronic Arca exchange, NYSE launched floor listing as an additional venue to attract issuers and products.
Despite higher aggregate listing and maintenance fees for floor treatment, some issuers say that the benefits are worth the incremental cost.
In November 2022, fixed-income specialist PIMCO was the first asset manager to bring an ETF to NYSE. Switching the $4.8 billion PIMCO Active Bond ETF, or BOND, to the floor meant its trading would include the oversight of a designated market maker, obligated under exchange rules to facilitate opening and closing auctions and incentivized to maintain tighter trading spreads.
Other listing venues — Arca, Nasdaq and Cboe — all have programs and rebates designed to narrow spreads. And many ETF issuers have capital markets desks that can help guide investors on significant trades. But as the market has been flooded with new products, particularly actively managed stock and bond ETFs and those employing derivatives in their strategies, more issuers are looking for ways to demonstrate to prospective investors that their ETFs have tight spreads and ample liquidity.
The shift to the floor is part of the evolution of exchange-traded products beyond index funds. U.S. ETP listings now top 3,000, with roughly 60% listed on NYSE properties, and around 20% for both Nasdaq and Cboe. All three have trading and incentive programs designed to improve quoting and tighten spreads, though any adjustments to their rules have to be approved by the U.S. Securities and Exchange Commission.
For PIMCO's BOND, average daily spreads were cut in half, ranging from 2 and 4 basis points since November 2022, compared to between 6 to 8 basis points for the immediately prior period, according to data provided by FactSet Research Systems. BOND competitors from J.P. Morgan Asset Management and Eaton Vance, a unit of Morgan Stanley, have also moved to the floor.
“A designated market maker can help the order book at size and add tightness to trading,” said Paul Weisbruch, head of ETF issuer services at GTS, which serves as DMM for 23 ETFs, including the entire suite of offerings from Strive Asset Management and TCW Group.
Strive, which has $1.5 billion in assets under management across 12 ETFs, took its products to the floor in January, while TCW, with $1.4 billion across six ETFs, moved in late May.
Still, trading spreads in ETFs are also a function of the liquidity of underlying assets. For example, similar products from Strive and TCW that add governance preferences to a basket of the 500 largest U.S. publicly traded stocks, saw only marginal spread improvement, according to FactSet.
Yet according to data provided by NYSE, the ETFs that had transferred to the floor through the second quarter of 2024 had seen average spreads cut to 18 basis points from 41 basis points, mostly experienced by smaller products with limited trading. Opening slippage, the drop in the expected price on market orders on open, fell to 25 basis points from 68 basis points.
“It’s a little bit of back to future,” said Douglas Yones, head of exchange products at NYSE. When ETFs first listed on the American Stock Exchange in the 1990s, they were guided by specialists. “Now we’re combining technology with a human element to solve a problem for some ETFs.”
For years, ETF trading has come with caveats. "Avoid the open and close. Don’t place market orders," distributors say. For those investors jumping to ETFs from mutual funds, this conversation was always a head-scratcher. Mutual funds only had one price. So, issuers new to the ETF market would need to either to build up an ETF capital markets desk or work with a third-party platform to support those investor conversations.
“This solution outsources some of the capital markets desk,” Yones said.
That was definitely the case for Sound Income Strategies, which moved its two ETFs to the floor on June 21.
“We were getting investor feedback that trading spreads had to improve before larger brokerage platforms could approve our ETFs for clients,” said James McConaghy, head of distribution for Sound Income Strategies. “On Day 1, we saw spreads come down significantly.”
McConaghy has biweekly calls with Tidal Financial Group, the white label ETF firm that provides the platform for Sound Income Strategies and 61 other issuers, collectively managing 172 ETFs and nearly $20 billion in assets.
“The growth of actively managed ETFs as well as multiasset-class products has definitely made ETF market making more complicated,” said Michael Venuto, chief investment officer at Tidal Financial Group. “For complex products, a more dedicated support system can be beneficial.”
Of course, the additional support has a cost that can range from $10,000 to $20,000 more per ETF annually for the designated market maker program. Launching an ETF on the NYSE floor, as opposed to switching from another exchange, can add another $20,000 or so to the initial listing fee.
To some, that cost is de minimis if assets rise significantly.
Within the complexities of ETP listing and trading, each exchange has programs and incentives designed to attract issuers and market makers.
“Sometimes maker-taker doesn’t move the needle,” said Robert Marrocco, vice president and global head of ETF listings at Cboe. This is the traditional scheme by which an exchange offers a rebate to market-making firms that add liquidity by posting orders. Since 2016, Cboe has continually refined its own liquidity incentive program and moved to a stipend-based model that compensates market makers for improving market quality. The market makers have to "tighten up the spread and provide more depth on the book" to earn the stipend, Marrocco said.
Similarly, Nasdaq has a designated liquidity provider program to encourage tightness and depth. The exchange enhanced the DLP program in 2021 with a market-maker stipend focused on newly-launched or thinly-traded products.
“The role of an ETF market maker is pivotal in order for ETFs to trade efficiently and for all types of investors to receive the best executions,” added Alison Hennessy, head of ETP listings at Nasdaq.
While the NYSE floor program has attracted roughly 1% of current U.S. ETP listings, including some from Cboe and Nasdaq, as well as NYSE Arca, the surge of new issues and the scramble for ETF assets has the entire marketplace thinking about how to improve the investor experience.
