The Wall Street Journal writes that the rapid decimation of elite traders known as 'specialists' is proving problematic to ETF firms, who in the past relied on specialists to seed new ETFs. Over the past year, specialists on the NYSE have declined by over 30% as floor traders are phased out in deference to electronically cleared trading. Exchange traded funds [ETFs], which resemble mutual funds but trade on the open market like stocks, use seed capital to create shares (usually between 100,000 and 500,000) so that the ETF can begin trading with a big enough float to keep flow liquid. As recently as two years ago, specialists were offering ETF firms $50 million to seed promising ETFs. Now, many ETFs are launching with as little as $3 million, making them unattractive to institutional investors who need the ability to move in and out of large share blocks with minimal slippage. Case in point: In late 2006, Claymore MacroShares Oil Up and Down Tradeable Shares, which track crude oil prices, were hit with an unusually large order, causing share prices to fluctuate to over 10% premiums and discounts to its net asset value. The Journal says ETFs may in some way be a victim of their own success [see chart]: with more than 300 slated to launch in 2007, the lack of seed funding may prove to be a serious concern.
Sources: Wall Street Journal
Commentary: ETFs Gaining Ground On Mutual Fund Industry • Amex Patent Paves the Way for Actively Traded ETFs • Most Mutual Funds Are Missing the ETF Train
Stocks/ETFs to watch: State Street Corp. (NYSE:STT), WisdomTree Investments Inc. (WSDT.PK), Amvescap plc (AVZ), Barclays plc (NYSE:BCS), Merrill Lynch & Co. Inc. (MER), Bank of New York Company Inc. (NYSE:BK) [ETF issuers]
Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.