The Value of Using a Block Desk for ETF Trades
Discover the benefits of using an institutional block desk when you have an ETF trade.
Think your trade is not big enough to bother a block desk? Think again. The block desk is one of your best resources to attain best execution on an ETF trade—whatever the size.
"It never hurts to get the block desk’s opinion on an ETF trade. The traders have years of experience in high-pressure situations, insight on the depth of interest in an ETF and strong networks of relationships to share with advisors."
Matt Lewis, Head of ETF Implementation and Capital Markets
Of course on large trades, traders on the desk can source shares in both the secondary and primary market. It can also trade in increments to manage the effect the trade could have on prices or obtain a quote to execute the entire trade.
On smaller orders and lower volume ETFs, the block desk may find that it’s a better trading strategy for the advisor to go through the desk rather than directly into the market.
There’s More to ETF Trading Than Its ADV
The first move advisors usually make with a new trade is to look at the average daily volume (ADV) on a ticker. However, the on-screen or secondary market liquidity is only one source of liquidity for an ETF.
What you see on the screen, including the highest bid and lowest ask, reflects only the trading activity of buyers and sellers that has already occurred on the exchange.
In other words, the ADV shows only what has been traded, not what could have been traded.
The block desk’s order book contains additional shares it’s ready to trade. What’s more, its relationships with market makers let it tap the primary market not accessible to advisors. This is possible through a distinctive feature of ETFs—their multiple layers of liquidity.
The ultimate source of ETF liquidity comes from its open-ended structure. Unlike stocks that have a set number of shares, authorized participants can create new ETF shares and redeem existing shares based on investor demand.
The creation and redemption process ensures there is sufficient inventory to fill investors’ orders. Additionally, it allows large buy or sell trades to be executed in the ETF with little or no impact to the market.
To help better understand the depth of the market, the graphic below highlights ETFs’ three levels of liquidity and the depth of the market.
ETF Liquidity: More Than Meets the Eye
ETF Block Trade Examples
Below are a few examples of actual trade scenarios where the on-screen liquidity didn’t meet the trade requirements, and a block desk accessed the market depth not seen by the average investor.
These trades cover a variety of asset classes. In each case, the trades were executed efficiently, with minimal to no impact on the bid/ask spread.
Learn how to use trading orders to your advantage.
Real-World Example 1: American Century Large Cap Equity ETF (ACLC)
Desired Trade: 701,885 shares at $65.86 per share
On-screen liquidity (Level 1) at the time of the trade: 30-day ADV of 27,818 shares.
Through the block desk, the buyer was able to capitalize on the other layers of ETF liquidity (Levels 2 and 3) that were not visible in the on-screen volume.
The trade was executed at $65.85 per share, just a little below the ask price, for a total value of $46,219,127.
Real-World Example 2: American Century Quality Diversified International ETF (QINT)
Desired Trade: 538,750 shares at $51.68
On-screen liquidity (Level 1) at the time of the trade: 30-day ADV of 92,876 shares.
Through the block desk, the buyer was able to capitalize on the other layers of ETF liquidity (Levels 2 and 3) that were not visible in the on-screen volume.
The trade was executed at $51.66 per share, just a little below the ask price, for a total value of $27,831,825.
Real-World Example 3: American Century Quality Preferred ETF (QPFF)
Desired Trade: 273,371 shares at $36.76 per share
On-screen liquidity (Level 1) at the time of the trade: 30-day ADV of 22,894 shares.
Through the block desk, the buyer was able to capitalize on the other layers of ETF liquidity (Levels 2 and 3) that were not visible in the on-screen volume.
The trade was executed at $36.58 per share, below the ask price, for a total value of $9,999,911.
Contact Experts to Help You Execute ETF Trades
You are not alone when trading ETFs. From large to small trades to navigating market volatility, take advantage of the ETF community of professionals and the resources and tools they can provide. Their jobs are to support advisors in fulfilling their clients’ needs.
Institutional Block Deck
Advisors who are on institutional platforms have access to institutional block desks for ETF orders. These desks provide trade guidance, execution expertise and advice on trading strategies.
The platform’s website or advisory help center will have contact information for the institutional block trading desk.
Broker/Dealer ETF Trade Desk
Advisors or institutional investors who are not on an institutional platform or do not have access to an institutional block desk should contact their broker/dealer ETF trade desk.
Sales representatives at the broker/dealer should be able to direct advisors to the relevant ETF trade desk.
ETF Issuer's Capital Markets Desk
ETF specialists are available to discuss trade execution and provide overall guidance.
If you have questions around trade execution, please refer to the tools provided above or contact the American Century Investments® Capital Markets Desk through your American Century or Avantis Investors® representative.
Learn more about American Century Investments ETFs.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
You should consider the fund's investment objectives, risks, charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained by visiting americancentury.com/etfs, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
ACLC:
This fund is an actively managed ETF that does not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics. If the portfolio manager considerations are inaccurate or misapplied, the fund's performance may suffer.
QINT:
This fund is not actively managed and the portfolio managers do not attempt to take defensive positions under any market conditions, including declining markets. The portfolio managers also do not generally add or remove a security from the fund until such security is similarly added or removed from the underlying index. Therefore, the fund may hold an underperforming security or not hold an outperforming security until the underlying index reacts. This may result in underperformance compared to the market generally. In addition, there is no assurance that the underlying index will be determined, composed or calculated accurately. While the index provider provides descriptions of what the underlying index is designed to achieve, the index provider does not guarantee the quality, accuracy or completeness of data in respect of its indices, and does not guarantee that the underlying index will be in line with the described index methodology. Gains, losses or costs to the fund caused by errors in the underlying index may therefore be borne by the fund and its shareholders.
Historically, mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
On September 9, 2022, QINT began to track the American Century® Quality Diversified International Equity IndexB. Historical index data prior to September 9, 2022, is for the Alpha Vee American Century® Diversified International Equity IndexC. Spliced index data on and after September 9, 2022, is for the spliced Quality Diversified International Equity IndexB.
QPFF:
This fund is an actively managed ETF that does not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics. If the portfolio manager considerations are inaccurate or misapplied, the fund's performance may suffer.
The fund is classified as non-diversified. Because it is non-diversified, it may hold large positions in a small number of securities. To the extent it maintains such positions; a price change in any one of those securities may have a greater impact on the fund's share price than if it were diversified.
Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities may receive preferential treatment compared to common stock regarding dividends, but they are typically subordinated to a company's other debt which subjects them to greater credit risk. Generally, holders of preferred securities have no voting rights. A company issuing preferred securities may defer dividend payments on the securities and may redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities and may have less upside potential than common stock.
Floating rate securities are structured so that the security's coupon rate or the interest paid on a bond fluctuates based upon a reference rate. In a falling interest rate environment, the coupon on floating rate securities will generally decline, causing a reduction in the fund's income. A floating rate security's coupon rate resets periodically according to the terms of the security. In a rising interest rate environment, floating rate securities with coupon rates that reset infrequently may lag behind the changes in market interest rates. Floating rate securities may also contain terms that impose a maximum coupon rate the company issuing the security will pay, therefore decreasing the value of the security.
Concentrating investments in a particular industry or group of industries gives the fund greater exposure than other funds to market, economic and other factors affecting that industry or group of industries. The financials sector can be significantly affected by changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt, and the availability and cost of capital.
Exchange Traded Funds (ETFs): Foreside Fund Services, LLC - Distributor, not affiliated with American Century Investment Services, Inc.