October 11, 2014
I have been an equity options market maker and a commodity derivatives trader for almost 20 years, on behalf of mainly larger institutions like Goldman, AIG and Barclays. I acted in the capacity of advisor to Accushares over the course of the past year. My experience has taught me that one of the most important characteristics of any ETF is that it actually trades actively. The most novel ETF will do little good to the overall marketplace, if it does not attract a significant amount of trading volume from a variety of participants. Trading volumes generally require the participation of market makers, arbitrageurs, hedgers, and other investors in unison – if only one narrow group is served by a product, it is unlikely to succeed. Critical to gaining trading volumes is launching an ETF where most or all of these important groups (i.e. market makers, arbitrageurs, hedgers, and investors) care enough to due diligence the fund and evaluate the trading of the fund. Because, unlike mutual funds, investors are reliant on depth and continuity of trading prices for both purchases and sales, an ETF must be universal in usefulness to many types of market participants. Also, an ETF is less useful if it helps solve only one issue for investors (i.e., removing the futures trading and margin funding process) while at the same time creating others (roll yield uncertainty, foreshadowing calendar spread timing to the exchange members, tax liabilities, tracking error.)
I believe that the AccuShares funds are both highly relevant to a wide range of investors and highly approachable to all of them. An ETF which serves a narrow segment of individual investors is likely to ultimately close due to illiquidity and poor tradability. Similarly, an ETF which is targeted only at professionals probably doesnt need to be launched as an ETF. The better ETFs are where many types of investors meet to invest and trade. The best ETFs also help solve existing structural problems for traders and investors regarding term structure of price and/or volatility, beta to cash prices and tracking errors, and rebalancing inefficiencies like Accushares does.
The indexing in the AccuShares funds is arguably better for individual investors because the indices are easier to follow than some existing products, and because the market has been clamoring for better spot market proxies since the beginning of the ETF market. The indexing is also beneficial for the market making and institutional community, because they are also looking for better spot market proxies, because these indices create a more complete market for managing trading books and they are constantly looking for interchangeable/fungible/hedgeable instruments.
I would encourage the SEC to finalize the NASDAQs proposed rule order.