High-Speed Trading Firm Urges SEC to Address "Error-Prone" Trading Infrastructure for ETFs

In a recent comment letter to the SEC on its derivatives rule proposal Virtu Financial LLC, an electronic market maker and liquidity provider, urged the SEC to study the operational risk factors associated with ETFs and to push for a more robust transaction processing infrastructure. Virtu’s affiliated companies serve as market makers and authorized participants in numerous exchange-traded funds. The comment letter described the uncertainty and risks in the trading infrastructure for ETFs, specifically the challenges of anticipating and controlling the number of trade executions and positions near market close. Virtu noted that despite the rapid growth of the ETF market “electronification of this corner of the market has been particularly slow” and that many interactions for creations and redemptions are still conducted via email and in some cases via the phone. Virtu wrote that the transaction processing infrastructure for creation/redemption processes is “not straight-through and is susceptible to human error” and proposed that an automated interface “will minimize the chance of human error and enhance the [authorized participant’s] ability to manage risk at a very crucial period of the trading day.” Virtu also proposed that infrastructure improvements would translate to narrower spreads and lower costs. Market makers like Virtu earn the spread between the bid and offer prices on ETFs and on the difference between the price of the ETF and its underlying components.