Dan Madden of Northern Trust, joins ETF TV to explain the role of a ETFs capital markets team

Presented by Northern Trust.

Margareta Hricova Welcome to ETF TV. Your insight into the world of exchange traded funds, issuers and investments. I’m Margareta Hricova and joining me today is Dan Madden, Head of ETF Capital Markets at Northern Trust and Deborah Fuhr. Welcome Dan and Debbie.

Dan Madden Thank you.

Deborah Fuhr Thank you. Great to see you Dan. What is the role of the capital markets desk?

Dan Madden The capital market desk has really three roles. One it’s dealing with the external participants. That’s pretty normal scenario. Market makers, authorized participants, exchanges, groups that are involved heavily in the secondary markets and primary markets. The second role is focused on the interactions of those market participants with internal groups, such as portfolio managers or trading desks, making sure that there’s seamless interaction for all transactions that occur. And then the third role at Northern Trust, it’s a lot of working with the groups internally to help them understand ETFs, their inner workings, how they interact not only internally with the sales teams, but also with compliance, with marketing, with product development, with product strategy, really bringing the outside ecosystem into Northern Trust.

Margareta Hricova And how does your team look to work with various market participants?

Dan Madden The lead market makers are effectively chosen based on their capabilities. So what we look for is groups that handle asset classes, specific asset classes, have a specific focus on how they trade, why they trade, how they handle risk. And especially important in our product lineup is groups that handle the risk through a centralized response, which is important to how we manage our line up in the secondary and primary activity.

Deborah Fuhr You mentioned centralized risk books. Can you describe what this means?

Dan Madden A centralized risk book, simply put, is like this big cauldron of executions. ETF executions get dropped into this big cauldron, mixed about and effectively are managed just like a portfolio risk. They understand the risk, they understand the portfolio exposure, they mix it around, and they put offsetting hedges against this and effectively trying not to allow have bubble over, so to speak. So it’s not only trading and digesting the risk for all the executions, but also offsetting that risk accordingly.

Margareta Hricova And does this process benefit all types of ETFs?

Dan Madden All ETFs will go into this cauldron. So you have beta type exposures that generally have higher volume high turnover extraordinarily efficient. But the names that have really benefited are the lower volume names, where the centralized risk book actually allows these lower volume names to gain the same type of efficiencies as the beta and high turnover products. The ETF market participants are looking at the exposure of the low volume names and putting on an equal playing field as the beta exposure. These low volume names, where they’re trading 100 shares a day and have random large prints. It allows the market participants to effectively digest this risk on an equal playing field very easily and very cleanly unleash the potential liquidity of that underlying exposure.

Deborah Fuhr That’s great. Thank you for joining us.

Dan Madden I appreciate you having me today.

Margareta Hricova Thank you to Northern Trust for sponsoring this episode, and to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit us at ETVTV.net. Thank you.

ETV news does not provide investment advice nor recommend products.

Published on February 29, 2024