ETF Insider is a new Q&A series with the visionaries and thought leaders who transformed the ETF industry. Today we profile Chris Hempstead, Head of Sales for ETF Trading at KCG.
What is your role?
Currently, I’m head of Sales for ETF Trading at KCG. My team members and I focus on insuring that our clients are getting access to best execution – which in our view includes providing them with fair and transparent information about our approach, valuations and pricing. Sometimes helping clients execute their programs means assisting them with cost estimates and portfolio netting, but our first priority is making sure there are no 'unknowns' when it comes to pricing and execution.
How long have you been working in the industry?
I started on the floor of the NYSE in 1993 as an equity specialist clerk. I had interned on the floor of the NYSE and on an off floor OTC desk. Early on I wanted to have a career in market making – I wanted to be part of engine of the capital markets in a meaningful way. Over time, the markets have evolved significantly – and so has my role in it. The market is more efficient, accessible and transparent than it has ever been, and it has been truly exciting to be a participant in the dramatic growth of the ETF marketplace. I have been trading ETFs since 1999, when I was hired to run the order book for the QQQ.
How long have you been at KCG and what drew you there?
I joined KCG in October 2013. KCG’s predecessor firms (Knight Capital and Getco) have for many years been major players in the ETF and Equities markets. The reputation, talent and infrastructure of KCG forms what I believe to be the perfect combination ingredients to continue serving as a major, innovative player in the next phase of growth in the ETF space. Having a massive market share, great technology and deep liquidity expertise is only part of the equation – this firm is committed to the kind of transparency and execution excellence that our clients should expect from their trading partners. It is the right basis for very strong and enduring client and issuer relationships.
What does your firm do with ETFs?
KCG has three major components to its business: Client Execution, Liquidity Venues, and Market Making. It is a simple, but powerful new model. All three provide tremendous benefit to our ETF client base. KCG is the lead market maker in roughly 600 ETFs in the US alone – which gives us a considerable amount of insight, trading and valuation expertise. On the client side, my team works closely with issuers, clients and other broker dealers to provide efficient and fair execution across all ETFs. It is this very efficiency that we think will provide for that next phase of growth in the ETF space. The low cost of implementation will help drive up assets being held in Exchange Traded Funds.
How have ETFs responded to recent events in the world economy?
ETFs have become increasingly innovative. Issuers have responded to global trends by creating ETFs that conform and help express an individual’s or institution’s view on the direction of a subset of the global markets. There have been several new launches which include currency hedged ETFs, tail hedged funds, leveraged commodity funds and more. This is the Street asking the issuers to create products they 'wish' existed.
How have strategies changed over the years?
With more than 1500 ETFs listed in the US, there are thousands of combinations of strategic ETF portfolios. We will continue to see these models evolve as their track records are extended and the models have more time to backtest. The growth curve here is steep, and it means many more investment choices and “flavors” can be made available to the end client.
When discussing ETFs today, what are we not discussing that we should be?
We at KCG, because of our unique perspective, have been spending a lot of time talking about the missing ingredient. It is quite simply: “execution quality.” Many of our discussions have related to this subject and how critical it is to performance, such as discussions around 'trading time horizon,' for example. This is an important piece of information when deciding the best course of action for efficient execution. We first need to know how urgent the implementation is and from there, we can decide the most efficient execution route. Far too often this small piece of information is left out – and it can mean that your cost of trading is too high or you experience negative impact – which makes a difference to your performance.
What are some of the biggest challenges in trading ETFs in today’s markets?
Some ETFs may sound attractive because they offer exposure, in the form of a wrapper, to assets that are otherwise difficult to trade. But these funds are themselves beholden to the underlying liquidity of their assets – if the underlying securities are not liquid, this has an impact on the liquidity of the ETF. These kinds of funds prove to be a real challenge to trading desks. There are some funds in which the underlying liquidity is so low that only a small number of shares can be created in any given day. There are other challenges that smaller issuers are trying to solve for. Low assets and slow growth make it difficult for new and innovative ETFs to survive as they patiently wait for the assets to get to a sustainable level. ETFs have pretty low fees so keeping these funds opened with low assets and low fees is a challenge. This means that being able to anticipate liquidity is critical to developing a solid strategy.
What questions are you hearing most often from your clients?
Clients frequently ask about the cost to create an ETF versus the cost to trade the ETF in the secondary market. This is a direct result of education on the ETF execution front. While most ETF orders do not meet the size requirement to 'create' and 'redeem' ETFs, it is becoming increasingly clear that clients want to know what those costs are. This is a pretty sophisticated question and shows how attuned investors are becoming to this asset class.
What motivates you – what do you like best about your current role?
I get pretty excited when I get to tell people about how and why ETFs are priced the way they are, how to avoid pricing that might be too high or too low. Most importantly, I look for something in a day’s activity that many people might have overlooked. I absolutely love to converse with clients about execution, market color, strategic portfolios and market making. This asset class is a great barometer of the market overall, and since I also love talking to clients about it, you could say I’m in the perfect job.
What was the best career advice you’ve ever received?
Early on in my career I had my first trading error. I was pretty upset and began questioning whether or not I was meant to be in this business. My boss pulled me aside (this guy looked and talked like Tony Soprano). He said to me, "Kid, you know why am in the position I am in? Because I made mistakes, but most importantly I learned from them. You want out, there is the door. If you learned something today, get back to work and figure out how to avoid making that mistake again." This open, honest and reassuring speech proved to be great advice.