Skip directly to Accessibility Notice

A Quick Guide to RFQ Trading for ETFs

June 06, 2023

Watch Time 5:14 MIN

As off-exchange trading becomes more popular among clients, James Kim, Director of ETF Capital Markets, walks us through the RFQ process for trading ETFs.

“On” vs. “Off” Exchange Trading

One of the trends that we've been noticing across the industry is the increase in off-exchange trading versus on-exchange trading. And this phenomenon holds true for VanEck products as well.

For example, if you look at the volume breakdown of ANGL, EMLC, HYD, and ITM, you'll actually see that the majority of secondary market volume takes place off-exchange versus on-exchange.

On-exchange means volumes that include or volumes that show up on any of the three major exchanges or any of their affiliates. Those three exchanges are NYSE, CBOE, and NASDAQ. Typically the exchange that is the listing venue of that particular fund will see the vast majority of that volume as the opening, closing auctions take place on that venue.

Off-exchange trading are all trades that print on any of the trade reporting facilities, or TRF for short. Prints to the TRF include electronic non-exchanges, but they also include OTC trades like voice trades with a broker or even RFQ trades, which we're going to do a little bit of a deeper dive into.

We've seen RFQ trading start to become a lot more popular with clients and we think there are four main reasons why. Number one, RFQ trading allows for immediate risk transfers and block size versus trading on exchange. Number two, RFQ trading allows for one to trade with a known counterparty versus also trading on exchange. Number three, via RFQ trading, it is much easier to demonstrate best execution, via trading voice. And finally, number four, RFQ trading allows for full straight-through processing, which alleviates operational risk because the trade itself will flow through end-to-end without any manual intervention.

The RFQ Process

The RFQ process is relatively straightforward. Generally, what we'll see are clients putting anywhere from three to five brokers in competition with one another for a two-way market, either on risk or on NAV. We generally don't recommend putting more than five brokers in competition with one another, just because of the risk of information leakage, which could lead to adverse execution from the client standpoint. With that said, once those requests have gone out, brokers have a certain number of minutes to respond, and from there, the client picks the winning bid or the winning broker. The winning broker is generally the broker that comes in with the most competitive price. In the event multiple brokers come in with the same price, the winning broker tends to be the broker that responded the quickest.

Most RFQ platforms will also conduct periodic broker reviews, just so that from a client's standpoint, he or she has the best information possible as to which brokers have historically responded the quickest as well as with the highest quality of prices.

In addition, another advantage of trading on one of the RFQ platforms are the added functionalities that come with many of these platforms as well. For example, most platforms, most RFQ platforms have added a switch trading functionality as well.

How can clients access RFQ for ETFs?

Now, how can clients access RFQs for ETFs? Most custodians will offer block desks for their custodial clients. So that's definitely one resource that we would very much recommend that clients utilize or look into. But in addition to that, there are other third party RFQ platforms as well. To name a few, Bloomberg RFQE, Tradeweb as well as Virtu RFQ Hub are three other resources that clients could look into. With that said, if for whatever reason none of those four options work, feel free to reach out to the capital markets desk here at VanEck, and we'd be more than happy to put you in touch with the right parties if this is an avenue that you are looking to utilize.


IMPORTANT DISCLOSURE

Net Asset Value (NAV) – the net value of an investment fund’s assets less its liabilities, divided by the number of shares outstanding. NAV is the price at which the shares of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded.

A block trade is a large-scale transaction carried out by institutional investors, typically off the open market to avoid impacting the security's price. It involves buying or selling a substantial amount of securities, often facilitated by investment banks or brokerage firms. Block size refers to the number of securities or dollar value of a proposed block trade.

OTC stands for "over-the-counter." This refers to the process of trading securities directly between two parties, without going through a centralized exchange. OTC transactions can involve a variety of financial instruments such as stocks, bonds, commodities, or derivatives. OTC markets are less regulated, which can offer more flexibility but may also come with increased risk.

RFQ (Request for Quote) trading is a process where a buyer requests a price quote for a financial instrument from dealers. The buyer compares the given quotes and decides where to trade. This method is commonly used in over-the-counter (OTC) markets and electronic trading platforms.

NASDAQ refers to the Nasdaq Stock Market, an American stock exchange based in New York City.

CBOE refers to Cboe Global Markets, which owns the Chicago Board Options Exchange and the stock exchange operator BATS Global Markets.

NYSE is an American stock exchange, which is the largest stock exchange in the world by market capitalization.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.

An investment in the VanEck Fallen Angel High Yield Bond ETF (ANGL) may be subject to risk which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, energy sector, consumer discretionary sector, information technology sector, financials sector, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund.

An investment in the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) may be subject to risks which include, among others, foreign securities, investing in African, Asian, Chinese, European, Latin American and emerging market issuers, foreign currency, credit, interest rate, high yield securities, sovereign bond, cash transactions, market, operational, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, non-diversified, and concentration risks, all of which may adversely affect the Fund.

An investment in the VanEck High-Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, special tax bond, California, Illinois, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.

An investment in the VanEck Intermediate Muni ETF (ITM) may be subject to risks which include, among others, municipal securities, credit, interest rate, call, California, New York, special tax bond, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

©  2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

666 Third Avenue, New York, NY 10017

Related Topics

Follow Us

Related Topics