When an order comes in from a client to buy an ETF, how do you fill that order?
There's no concrete thing that we do every single time. It depends on how many shares need to be bought or sold and what the underlying volume of the ETF is.
If you're trading the S&P 500 SPDRs (NYSE Arca: SPY) or any of the other very liquid ETFs, there's a ton of liquidity in the open market and it's really up to the customer as to what they're looking for in an execution. Some want to work the trade over half an hour; others want to just print the order immediately.
If we're going to trade an ETF for a client in the open marketplace, we'll look at the short-term stochastics to see if the fund is overbought or oversold. We'll also look at what's happening in the sector and if any news is coming out anywhere. We'll also consider the macro outlook of the market-whether it's ripping up or might pull back a bit-and we'll trade based on that.
We use dark pools, the open market, internal crossing and position bids. We do not advertise orders, but we do know where the bodies are buried. If a client needs to trade 200,000 shares of an ETF that usually trades thinly, you can usually get it done in a few minutes. We'll get some liquidity in the market, and then get a position bid if it's really oversized.
By 'position bid,' you mean ... ?
The way I do position bids is I ping [all the liquidity providers on the Street] instantly, and everybody comes back with a bid and an offer. I then take the best bid and the best offer. It might be a NewEdge bid and Knight offer, or vice versa. I show that to the customer. So no matter where else they go, I should always have the best market, because I take the best of what's out there from all the providers.
Do you act as a principal or an agent in the trade?
Agent. We will act as principal if someone is selling a small position and the position bids are out of whack; but generally, we're an agent.
What do you charge?
Generally, we work on commission. Some customers want to do a net markup on the trade, and we'll do that. But generally, we charge a penny or two pennies per share.
What's the minimum order size where it makes sense for an investor to use your services?
If you can sit at your desk and go through your open market system and buy 5,000 shares of a very liquid ETF, and they will charge you half a cent to do that, obviously it will be cheaper for you to place the order that way.
But if you're going to be moving the market more than 2 cents on your order, you should use someone like us. The true cost of trading for an investor who is moving the market will be higher than if they came to us.
The other caveat is that, if you custody your funds at Schwab, TD, Pershing, etc., you have to know what your "trade-away" fee is. If your trade-away fee is $30, your order has to be sizable enough-maybe 10,000 or 20,000 shares-to justify covering that charge. [That's especially true] if you don't have an omnibus account set up through your prime broker.
How easy is it to set up an account with your firm? Can I trade with you and custody the funds elsewhere?
You can custody wherever you want. Custody and trading are two separate things. From our perspective, it's better for an RIA to custody at TD or Schwab or Pershing or someone like that. Those companies do custody well. But on the trading side, you can get better executions elsewhere.
Ninety-nine percent of accounts can be traded and opened the same day as long as the paperwork's in place.
What are Street One Financial's distinguishing characteristics?
We are an upstart, so we work very hard to build relationships. We also have some unique value-add services that we provide.
For instance, we have a 63-page Excel spreadsheet detailing the companies and sector exposures of all ETFs. If a portfolio manager wants exposure to some specific part of the marketplace, he can pull it up and see, well, there are four different ETFs in this space. He may not necessarily want the first or most popular one. We work with RIAs and PMs to help them decide which ETF gives them the exposure they are looking for.
We also offer a technical analysis system that's ETF-centric. It's not as pretty as bulge-bracket shops will give you, but it's ETF-focused and provides straightforward advice on support, price trends, ETF picks, etc.
We don't charge for research. It's part of the value-add we deliver.