Opening Cross: Of Indexes and ETFs: Desperately Seeking Stability

Max Bowie, editor, Inside Market Data

Prior to last Thursday’s 512.76 point drop in the Dow Jones Industrial Average, and in spite of continued uncertainty about the quality of US debt even after finally agreeing a deal to raise the nation’s debt ceiling, wiser souls than me could have predicted a sharp correction. The Chicago Board Options Exchange’s VIX volatility index—often referred to as the Fear Index—was rising, hitting a 13-month high on Thursday, and for the month of July, the DJIA fell 271.1 points. And for the last week in July, the index dropped by 537.92 points—more than Thursday’s one-day slide.

But before that, the second quarter showed hopeful—if modest—returns, if the recent round of financial results from stock and derivatives exchanges is anything to go by, with market data proving a growth area as other business segments continued to struggle. One area where exchanges can gain traction is in the provision of low-latency and historical data to high-frequency traders, who need vast quantities of data to build, test and deploy their trading strategies, and who must re-tool those strategies more and more frequently, resulting in higher data consumption.

For example, to appeal to these HFTs, CME Group is now migrating the last of its products to new matching engines, which provide improved latency and data granularity, while also stimulating higher order volumes and—in theory—more liquidity, making it a more attractive market for even more HFTs. Meanwhile, Brazilian exchange group BM&F Bovespa set a new record for trades executed via direct market access using co-location last Wednesday, Aug. 3. BM&F also saw a sharp increase in the number of exchange-traded fund trades in July, rising 25 percent over June.

The growing popularity of ETFs (see a special mention in Deutsche Börse’s results)—and the need to understand the asset class, which can provide a more stable way to gain exposure to new areas: less risky than picking a basket of stocks, and more efficient and flexible than mutual funds—is driving deals such as this week’s data distribution agreement between ETF data specialist XTF and data aggregator Rimes Technologies.

In a recent note, Michael Iachini, director of investment management research at Charles Schwab Investment Advisory, said that “every investment niche—from small-cap stocks to emerging markets or oil—can be fulfilled by a multitude of ETFs,” adding that these can still be confusing and require research into their holdings and even legal structure. Hence, XTF’s rankings and research on ETFs—which analyzes each fund and its components by a range of factors—can be a valuable tool for investors and asset managers alike to determine the best ETF for their performance and risk criteria. The deal with Rimes allows Rimes clients to access that data alongside the other validated benchmark data they receive from the vendor, including a database of 70 data fields of fund-level information on historical performance and assets covering more than 6,700 funds from Hedge Fund Research, along with its HFR indexes, which also became available over Rimes last week.

At time of writing, I’m waiting to see how the DJIA will close this week. But it seems almost that the economy is at a tipping point: It could shrug off its anchors and steam ahead to the next impasse, or it could slowly start to sink again until another initiative to bail it out. But there is a third way, which—like ETFs—is to seek out a stable growth position, rather than chasing profits that require unduly high levels of risk. It’s not sexy, and it may be the antithesis of every trader on Wall Street. But ever hear of the tortoise and the hare?

So why not take a leaf out of First Communications, which is upgrading its backup network routes: low latency may be critical, but redundancy and reliability is essential.

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