Joe Preisser, Portfolio Specialist, Brinker Capital
In light of the continued media attention focused on the performance of certain exchange traded funds, during the equity market selloff at the end of August, we thought it prudent to discuss the steps we take here at Brinker Capital to ensure that all of the client orders entrusted to us are handled with the utmost care.
The price action seen across the exchange traded fund (ETF) landscape in late August, and in particular on the 24th, was nothing short of extreme, and is something our trading desk makes every effort to protect our client’s orders from. We use our trading expertise and depth of experience to ensure that we make every effort to achieve the best executions available for our client’s orders. ETFs have truly changed the investment landscape through their unique construction and, as a result, require a thorough understanding of their characteristics in order to effectively trade them. We pride ourselves on having gathered a great deal of knowledge, insight and experience in trading these instruments over the past five and a half years, and on having developed strong relationships with a number of well-respected trading desks on Wall Street to further enhance our expertise.
As many of the articles in the financial press discussed, there was a historic level of volatility during the first hour of trading on Monday, August 24, with much of the drastic price swings caused by the exorbitant number of trading halts that occurred across equity markets. As an ETF is predominantly a simple reflection of the average price of its components, if those underlying constituents are halted, the ETF will not be priced appropriately by the market makers transacting in the security. This problem can also occur on more mundane openings as well, as an ETF’s components open for trading at slightly differing times. As a result of this phenomena, unless we have a very specific reason for trading an ETF during the first few minutes of a trading session—an ETF with European exposure would be an example of an exception—we will generally avoid trading during the first fifteen to thirty minutes of the session in order to allow for all of an ETF’s underlying holdings to open and the initial volatility to abate. Although we did not have any active orders during the morning of August 24, if we had we would not have been transacting until the volatility abated.
The strong relationships I mentioned earlier, with several of the most respected trading desks on Wall Street, allows us to leverage their expertise whenever we are moving into or out of a large position. We carefully examine every instrument we are asked to trade, and make our decisions on an individual basis as to what the best approach would be in order to minimize our impact on that instrument and to attempt to achieve the best possible executions. Often, when we have a large order in an ETF, which itself is relatively illiquid, we will utilize the expertise of one of our trading partners to transact directly in the basket of securities that comprise the ETF in order to access the truly available liquidity and to minimize our impact on the security we are trading. This strategy of course would not have helped on the 24th because it was the temporary illiquidity of the underlying securities that rendered the ETFs themselves illiquid, but I feel this example is important as it highlights the efforts we undertake in an effort to seek the best possible prices for our clients. In addition, a number of the articles discussing this episode highlighted the importance of imposing price limits while avoiding the use of “market” orders and this is a guideline we strictly adhere to. Whenever we have a meaningful trade, we always set an appropriate limit, and will closely monitor the trade until its completion to ensure that the price does not deviate from the parameters which we put in place.
While this article has discussed our approach to ETF trading, we certainly apply the same level of expertise, care and attention to all of the client orders placed in our care, regardless of the investment vehicle.
Brinker Capital, Inc., a Registered Investment Advisor. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.