Fewer Specialists = Problems for ETFs

Seeking Alpha (following up on a Journal article) reports having fewer specialists at the NYSE is creating problems for new ETFs:

"Over the past year, specialists on the NYSE have declined by over 30% as floor traders are phased out in deference to electronically cleared trading. Exchange traded funds [ETFs], which resemble mutual funds but trade on the open market like stocks, use seed capital to create shares (usually between 100,000 and 500,000) so that the ETF can begin trading with a big enough float to keep flow liquid. As recently as two years ago, specialists were offering ETF firms $50 million to seed promising ETFs.

"Now, many ETFs are launching with as little as $3 million, making them unattractive to institutional investors who need the ability to move in and out of large share blocks with minimal slippage.

"Case in point: In late 2006, Claymore MacroShares Oil Up and Down Tradeable Shares, which track crude oil prices, were hit with an unusually large order, causing share prices to fluctuate to over 10% premiums and discounts to its net asset value."