ETF - priced by underlying or trades ??

[GTS]

Quote from Tarl_Cabot:

That doesn't make sense.

There would be be no "arb" unless the Fund Administrators take some action.

That action would be necessary - otherwise the stock would be worthless.

I'm not sure I follow you, the owner of ETF's always have the option of exchanging their ETF shares for the shares of the underlying following the terms spelled out in the prospectus.

If at any time the ETF price deviates enough from the underlying it would a simple matter for somebody to arb the two and reap the profit (buy the ETF shares and sell the underlying or vice-versa). Commission costs would make something like that prohibitive for a retail trader but I am sure there are institutional trading programs that do exactly that.

 

[Tarl_Cabot]

I did end up doing a Google search for "EWJ prospectus" and skimming through it, found that:
- Barclays indeed does not intervene in the price
- Barclays will redeem EWJ shares for shares of the underlying, but there is a minimum of 240,000 shares and a $2,400 fee.
- They do this based on the price at the close of the US market.

SO, there is indeed a separate trading action for EWJ that is related to Toyota and the other components, but is nevertheless unrelated in terms of the fluctuations between the open and close of the US market (but perhaps may be related to perceptions concerning how the US trading today might affect business for Japanese companies, in this case).

BTW, Barclays calls this "tracking error" and calls the price at the close the "NAV". The prospectus contains stats on the tracking error in the past, and in this case, there have been two days per year of greater than 2.5% error, and two days per year of more than -2.5% error.

All in all, I think that the "possibility" of shares being exchanged is enough to keep the shares roughly equivalent to the underlying. I doubt that anyone ever shows up at Barclays with several million dollars worth of EWJ shares. (However, market makers evidently must fork over the requisite amount of Toyota, etc. in order to "create" EWJ shares.)

This also means that "retail investors" are dependent solely on this capability that vast institutions could step in, if the ETF price deviates too far. Someone who owns a standard lot of 100 shares has no recourse, it would seem.

 

[HoundDogOne]

Quote from loufah:

XLE exotic? It trades on average 20 million shares a day.

BBH moves approximately dollar-for-dollar with DNA. I've traded it a couple times when there's some announcement involving DNA after hours. There's often an ask that somebody left unattended that's underpriced. It doesn't look like it's arbed, at least out of hours.

Your statement is pretty much ridiculous.
Your attitude is that of a 10 year old in a school yard.
Pros eat weenies like you for lunch every day.

An ETF is "not arbed"?

Go make a few 1000 trades... and get an education.
Until then... just STFU.

 

[HoundDogOne]

Quote from Tarl_Cabot:

This isn't a discussion about trading, it's a discussion about execution, which is why it is in the Execution Forum, and not the Trading Forum.

In order to trade intelligently, you first have to know exactly what is going on. I'm still trying to find out exactly how ETF's are priced, hence the thread. I'm hoping that someone reading this actually knows, but if not, then I'll take the far longer route of asking Barclay's...

All the "execution" is the world won't matter...
If you do not have ** proprietary **, real-time ETF arbitrage software...
And are competing against 10 ms black boxes with your eyes and fingers.

Keep on barking up the wrong tree. Over and out.

 

[Tarl_Cabot]

Quote from HoundDogOne:

All the "execution" is the world won't matter...
If you do not have ** proprietary **, real-time ETF arbitrage software...
And are competing against 10 ms black boxes with your eyes and fingers.

Keep on barking up the wrong tree. Over and out.

I didn't say that the purpose of this information is "arbing", you keep assuming that.

The purpose of the information is understanding.

If I start at the beginning with certain conclusions, then I end up in the same place I started.

I can only get somewhere if I first obtain understanding of what is going on. Only then can I figure out the best way to go.

PS Getting back to the topic, I found the following on/by Yahoo:

Since ETFs trade like stocks, market makers (also called authorized participants or APs) are the folks that order the creation and redemption of ETF shares. Market makers build an ETF share from the shares of the companies in the underlying index. They create or redeem shares depending on the market demand for the ETF shares.

It should also be noted that market makers and specialists can create and redeem shares to arbitrage premiums or discounts to the underlying net asset value (NAV). This activity is beneficial to ETF investors because it keeps the price of the fund in line with the NAV and prevents specialists from making unfair markets. Think of it as a mechanism that ensures retail investors like us will get a fair price as the APs step all over each other trying to make a buck. Pretty neat, huh?

 

[infolode]

Quote from Tarl_Cabot:

I didn't say that the purpose of this information is "arbing", you keep assuming that.

The purpose of the information is understanding.

If I start at the beginning with certain conclusions, then I end up in the same place I started.

I can only get somewhere if I first obtain understanding of what is going on. Only then can I figure out the best way to go.

PS Getting back to the topic, I found the following on/by Yahoo:

Additional information:

http://www.federalreserve.gov/pubs/ifdp/2006/872/ifdp872.htm

http://www.wisdomtree.com/home.asp

I have other visual models I can give you if needed. Just pm me and let me know the format of choice.
mathematica, Maple or Derive. All three are interactive, streaming-updatable with drill down.

No, I'm not selling anything.

BTW the answer to your question is both but at different intervals.

The laymans answer is by trades and then underlying adjusted. (reset)

 

[loufah]

Quote from HoundDogOne:

Your statement is pretty much ridiculous.
Your attitude is that of a 10 year old in a school yard.
Pros eat weenies like you for lunch every day.

An ETF is "not arbed"?

Go make a few 1000 trades... and get an education.
Until then... just STFU.

Wow, project much?

Look, you were wrong when you said "One stock would never be 30% of an ETF... maybe max 3%." and you were wrong when you said it was true only for exotics. Why resort to ad hominems and profanity when someone corrects you?