From original post: http://www2.philly.com/philly/blogs/inq-phillydeals/etfs-vanguard-blackrock-state-street-prices-hedge-fund-billions-market-panic-20181128.html
The rapid growth of exchange-traded funds — which track a stock index, or some other group of assets — has fed speculation about what happens in the next big market collapse: Will ETF values still rise and fall with the companies’ underlying fund? Or will investors find themselves with devalued ETFs that become tough to unload, except at a discount to the stocks their prices are supposed to be based on?
ETF assets — an industry dominated by New York-based BlackRock’s iShares, Vanguard Group of Malvern, and State Street Boston Corp. — grew from under $1 trillion before the 2008-09 recession, to $5 trillion as of June, according to the ETF research and consulting group ETFGI. But new purchases slowed earlier this year to half of 2017 levels as stock market gains slipped.
“ETFs introduce new noise into the market,” according to a 2015 paper initially published by the SEC and written by a group of scholars including Rabih Moussawi of Villanova University. In a 2017 follow-up, they noted that ETFs had come to account for one-third of market trading, and that “ETFs impact the liquidity of the underlying portfolios, especially during events of market stress.”
Like other stocks, ETFs require a busy (“liquid”) market of buyers and sellers to accurately represent changes in the value of the companies they represent. New ETF shares can be created by brokerage firms that buy the underlying securities and trade them to ETF issuers such as BlackRock in exchange for the new ETF shares.
What’s in it for Susquehanna? Besides the ease of making short-term bets on market moves, ETFs’ appeal “was the flexibility it offered for hedging, arbitrage, and portfolio diversification,” Massa wrote. Susquehanna creates and redeems about 100 million ETF shares worth $1 billion a day.
Susquehanna, with offices across North America, Asia, and Europe, has for more than 20 years shifted partners’ (and sometimes customers’) assets in and out of stocks, futures, options, commodities, and even municipal bonds in search of price anomalies — sometimes very small gaps that it can exploit (arbitrage) with quick, well-timed, high-volume trading. The firm is famous for teaching its math-oriented recruits how to play poker as preparation for options and futures trading.
Susquehanna alumni who have founded large new ETF-trading hubs of their own include Reggie Browne, the “Godfather of ETFs” at trading giant Cantor Fitzgerald & Co.; Chris Hempstead, who built the ETF business at Virtu Financial’s KCG Holdings Inc.; and Tim Reynolds, Rob Granieri, and Michael Jenkins, who founded Jane Street.