ETF Securities is launching an exchange for ETFs that includes a consortium of over 15 global banks and asset managers (see Hedge Fund Review article). The structure allows each exchange member to be able to participate in trading, market making, and index replication activities while allowing counterparty risk to be spread among multiple exchange members.
By concentrating liquidity in a single location, ETFs that would normally be unavailable due to low demand and liquidity issues, can now be created and used for more specific purposes, such as hedge fund replication, without the same trading and credit worries. Certainly an interesting idea during a time when many are concerned about those on the other side of the transaction, especially when specialized, low liquidity securities are involved. This may be one way to help reduce both counterparty and liquidity risk for those researching and implementing hedge fund replication products.