Understanding #BHARATBond ETF's liquidity. @EdelweissAMC
@iRadhikaGupta @itsdeepakjain
BB ETF will have 3 levels of liquidity:
1. Visible secondary market liquidity - This is 1st level liquidity that comes naturally through buy/sell orders from existing investors.
@iRadhikaGupta @itsdeepakjain
BB ETF will have 3 levels of liquidity:
1. Visible secondary market liquidity - This is 1st level liquidity that comes naturally through buy/sell orders from existing investors.
Large size of BB ETF that will be spread across large number of investors will bring natural liquidity in BB ETF as they trade on exchange.
2. Hidden secondary market liquidity - If 1st level liquidity is not enough and spreads widen, then market makers will step-in.
2. Hidden secondary market liquidity - If 1st level liquidity is not enough and spreads widen, then market makers will step-in.
AMC will be appointing multiple market makers who have expertise in bond markets to ensure bid ask spreads are lower. These MM will hold ETF units and will have easy access to AMC enabling them to intervene and infuse liquidity on exchange at all times.
Activity from market makers will correct ETF prices incase they drift away from their fair value. This will enable investors to buy/sell BB ETF units efficiently on exchange without much impact cost.
3. Primary market liquidity - If Large investors with Rs. 25 crore and above transaction value are not able to buy/sell BB ETF units on exchange efficiently, then they can directly approach the AMC and get their units redeemed or create new units just like in any other debt fund.
AMC will facilitate such transactions by buying/selling underlying bonds from secondary market.
In this way BHARAT bond ETF will have 3 levels of liquidity, 1st and 2nd for regular investors on exchange and 3rd one for large investors directly through AMC.
In this way BHARAT bond ETF will have 3 levels of liquidity, 1st and 2nd for regular investors on exchange and 3rd one for large investors directly through AMC.
Today many ETFs dont have enough liquidity for multiple reasons -
Size of these ETFs is small or number of investors holding their units are limited and hence, natural 1st level liquidity is not present.
Size of these ETFs is small or number of investors holding their units are limited and hence, natural 1st level liquidity is not present.
In many cases market makers are not appointed or don't hold inventory hence, 2nd level liquidity is absent.
In many cases the basket size to deal through AMC is small and hence, many investors, even for few lakh worth transactions, approach AMC but don't come on exchange.
In many cases the basket size to deal through AMC is small and hence, many investors, even for few lakh worth transactions, approach AMC but don't come on exchange.
This creates a vicious cycle of lower natural liquidity on exchange leading to lower activity from market makers and hence lesser no. of investors comming on exchange, thus widening the spreads.
By institutionalising the entire process and ensuring 3 levels of liquidity, Edelwiess AMC has aimed to cut this vicious cycle and enable adequate liquidity in BHARAT Bond ETF on exchange.
