Fixed income exchange traded funds (ETFs) are reportedly struggling in the current liquidity crisis, while their market makers are trying hard to get delta neutral.
“ETFs have no outlet for cash bond baskets, they simply can’t rebalance in this market,” noted one trader. “They can’t get a bid.”
The London Stock Exchange (LSE) has taken the unprecedented step of relaxing the maximum spread within which markets makers can quote prices for fixed income ETFs. On its site the LSE issued the notice: “In light of recent global financial market conditions, London Stock Exchange advises registered market makers that, in accordance with Rule 4102 of the Rules of the London Stock Exchange, it is widening its maximum spread requirements to 5% for all Fixed Income Exchange Traded Funds. This will take effect from market open on Friday 13 March 2020 and will remain in place until further notice.”
The lower spread brackets are 1.5% and 3% and are set in agreement with the ETF issuers. Within the LSE’s rule book for market makers it notes that the exchange will occasionally allow market makers to relax spreads when an individual security is subject to wide price movements, but notes, “This is very rare and normally will not last more than a day.”
The rules state is will typically allow the relaxation of market-maker spread obligations when there are wide price movements, by increasing the maximum spread regime to an existing spread level, rather than provide a blanket waiver.
Of the 191 new exchange traded products listed on the LSE in 2019, 60 (22%) were fixed income products.
©The DESK 2020