Don't Go Down With the Ship; Do What's Right for the Company AND the Customer

Don't Go Down With the Ship; Do What's Right for the Company AND the Customer

Common sense must always prevail – especially when it comes to customer service. That said, sometimes companies create strict rules and policies or have a “system” that makes it impossible for an employee to deliver the customer service the company actually wants them to deliver.

Recently, I was sitting next to someone on an airplane who was on his way for a vacation on a cruise ship. We got into a discussion about how some people are so set in their ways that they can’t be creative about solving a customer’s problems. These people are so tied to their process and the way they have always done things that they jeopardize the relationship with their customer, even when common sense should prevail.

My fellow passenger has been on many cruises – and as good the customer service is on most cruises, he said there are always a few of the ship’s employees that are more focused on the system or process than on their customer. He then shared a few stories from his past trip about how some crew members lacked common sense. For some reason, it reminded me of the Titanic and how the eight-member band continued to play, even after the ship started sinking.

I thought that the story of the band playing while the ship was going down might be fictitious, so I did a little research to see if were true. Well, as the story actually goes, the reason for the band continuing to play was that Wallace Hartley, the band’s leader, had asked the band to keep playing because he thought it would help calm the chaos that was ensuing around them.

Maybe that was true, but I’d like to take some creative license and bend this story a bit to create a customer service lesson. My made-up version of the story has nothing to do with keeping the passengers calm. My version is that Mr. Hartley said, “Keep playing. We still have two hours to go in our set.” The passengers had all left to save themselves, but the band played on … as they went down with the ship.

The point is that Mr. Hartley’s band should have stopped playing immediately and tried to save themselves. Common sense should have prevailed. The band should have headed for the life rafts. But, sometimes people just do what they think they are supposed to be doing, without regard for common sense.

So, what does this have to do with customer service? The best companies hire people who are smart, problem-solving, customer-focused people who look for ways to work around having to say NO and come up with ways to say YES. They don’t get stuck on company policy. They work within the rules, but also understand flexibility. They will do what’s right for both the company and the customer. In short, they use common sense, especially when the ship is going down – or a customer is angry.

Shep Hyken
Client Experience
Twitter Email

Shep Hyken is a customer experience expert and the Chief Amazement Officer of Shepard Presentations. He is a New York Times and Wall Street Journal bestselling author and ... Click for full bio

Understanding ETF Liquidity and Trading

Understanding ETF Liquidity and Trading

Written by: ProShares

ETFs offer attractive features—access to a broad range of asset classes, sectors and styles in a liquid, transparent and cost-effective vehicle. But before using that vehicle, it’s helpful to understand how it works, especially the sources of ETF liquidity and the mechanics of trading them. Understanding these points may help you improve execution when buying and selling ETFs.

The Primary Market—Creation/Redemption of ETF Shares


Most investors trade ETFs on stock exchanges in the secondary market. But the actual creation and redemption of ETF shares occur in the primary market, between the ETF and authorized participants (APs)1—the only parties who transact directly with the ETF. The APs’ ability to continuously create and redeem shares allows them to meet the supply and demand needs of investors, making them key liquidity providers in the secondary market.

Creation. This is how APs introduce new ETF shares to the secondary market. 

  • In-kind—The AP creates ETF shares in large increments—known as creation units—by acquiring the securities that make up the benchmark the fund tracks in their appropriate weightings and amounts to reach creation unit size (blocks ranging from 25,000 to 100,000 fund shares). The AP then delivers those securities to the ETF in exchange for ETF shares.
  • Cash—Alternatively, APs can create ETF shares by exchanging the appropriate amount of cash for ETF shares, for what’s known as a cash create. Often, ETF shares are created using a combination of securities and cash.
  • The AP then offers the ETF shares for sale in the secondary market, where they are traded between buyers and sellers on an exchange.
     

Redemption. This follows the same process in reverse. 

  • The AP redeems ETF shares in large increments—known as redemption units—by acquiring them in the secondary market and transferring them to the ETF in exchange for the underlying securities or cash (or both) in the appropriate weightings and amounts.

The Secondary Market—Costs and Mechanics of Trading ETF Shares


Costs of Trading. In the secondary market, firms that specialize in buying and selling ETF shares—APs or market makers2 (liquidity providers)—trade them to provide market liquidity and make a profit. This profit margin is embedded in the bid/ask spread, which reflects the implicit costs of trading ETFs. 

Bid/ask spread is the difference between the bid—the highest price at which a buyer is willing to buy shares—and the ask—the lowest price at which a seller is willing to sell ETF shares. Three key factors impact the bid/ask spread:

  • Creation/redemption fees charged by the ETF provider to the AP.
  • Spread of the underlying securities—The bid/ask spread and liquidity of the securities that make up the ETF affect the liquidity and the bid/ask spread of the ETF itself. When there are many bids and offers on a security, it is easy to buy and sell, thus the bid/ask spread tends to be tight. When securities are less liquid, the spread is wider, making the cost to acquire them higher. The higher the cost of acquiring the underlying securities, the wider the ETF bid/ask spread.
  • Risk or hedging costs—Holding ETFs entails certain risks, which need to be hedged. Liquidity providers use a variety of financial instruments, including futures, options and other ETFs, to hedge this risk. The more instruments they have to choose from, the lower their hedging costs and the lower the bid/ask spread. The higher the risk, the wider the spread. 
     

ETF bid/ask spread = Creation/redemption fees + spread of underlying securities + risk


Executing Large Orders—Tapping Into Deeper Pools of Liquidity


There are two common ways to execute larger trades directly with liquidity providers, both allowing investors to access deeper pools of liquidity than those offered in the quoted secondary market alone:

  • Risk trade—A liquidity provider will quote a price for an ETF at a given size. If that price is accepted, the trade is executed and the liquidity provider assumes the market risk of providing the liquidity at execution.
  • Create/redeem—For orders that are large enough, it may make sense to work with an AP to create or redeem shares. This type of transaction is usually executed at either the closing market price of the ETF or at the NAV of the ETF plus fees or commissions.
     

Mechanics of Trading. To fully consider an ETF’s total costs, it is important to understand the dynamics of trading. In general, two types of orders are commonly used to trade ETF shares: 

  • Limit order—Buy or sell ETF shares at a specified price. One way investors decide at what price to enter a limit order is to look at the IOPV3 as a guidepost. Limit orders may help investors get the best price, but there’s a risk the order will not be filled.
  • Market order—Buy or sell immediately at the prevailing price available at the time. With market orders, execution may be faster, but the investor has limited control over the execution price.
     

While a large number of transactions are executed using limit or market orders, investors often find their order is larger than the quoted market. There may be “hidden” liquidity within the quote that can be accessed in the market using limit or market orders. However, in some cases, it may make sense to execute trades directly through a liquidity provider. How and when to place an ETF order can depend on many factors, including price sensitivity, level of urgency and overall goals for the portfolio. Determining what factors matter most can help determine the best execution strategy.

Questions? Our capital markets experts can help. Learn more about our ETFs here.

1 An AP is a U.S. registered, self-clearing broker/dealer who signs an agreement with an ETF provider or distributor to become an authorized participant of a fund.

2 A market maker is a broker/dealer that buys and sells securities (or ETFs) from its own inventory to facilitate trading in those securities. Most APs are market makers, but not all market makers are APs.

3 IOPV is the Indicative Optimized Portfolio Value—the intraday net asset value of the basket of underlying securities

Investing involves risk, including the possible loss of principal. ProShares are non-diversified and each entails certain risks, which may include risk associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Please see their summary and full prospectuses for a more complete description of risks. Carefully consider the investment objectives, risks, charges and expenses before investing. This and other information can be found in the prospectus; read carefully before investing; obtain at ProShares.com. There is no guarantee any ProShares ETF will achieve its investment objective. 
Guest Contributor
Twitter Email

If you are interested in contributing a guest article, please contact us here.