In this episode, Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange, is joined by Ugo Egbunike, Fixed Income Specialist at Jane Street Capital as they discuss the role of market making and providing liquidity across the ETF industry, alongside best practices for entering and building a new ETF franchise.

Douglas and Ugo discuss:

• The role of ETF liquidity providers
• The evolving role of market making desks
• Best practices for building a successful ETF franchise

Doug Yones:

Hello, and welcome to ETF Central's The Podcast, where we bring the latest and greatest ETF industry perspectives directly to you through in-depth conversations with key thought leaders from across the ETF ecosystem. I'm your host, Douglas Yones, the Head of Exchange Traded Products at the New York Stock Exchange, the home of ETFs. Now, today, I'm joined by my friend, Ugo Egbunike. He is a fixed income specialist on Jane Street Capital's institutional sales and trading team. In this capacity, Ugo wears a number of hats. He partners with institutional clients, provides trading solutions, access to Jane Street's liquidity. He also advises ETF issuers, quite a bit on product development, capital markets, best practices. I think, Ugo, between you and Kaity, you spend quite a bit of time, really, bringing brand new ETF issuers into the markets and helping them. Thank you for being here. Thanks for spending the time with me today.

Ugo Egbunike:

Thanks for having me, Doug.

Doug Yones:

Okay. We need to start at the very, very beginning, right?

Ugo Egbunike:

Okay.

Doug Yones:

There's been things written in the media about Jane Street, but I don't think people... If they haven't had the opportunity to really visit the headquarters, go into the office, talk to you guys, see you, could you give us a lay of the land? What is it Jane Street's doing each and every day? How are your teams working with issuers, et cetera?

Ugo Egbunike:

Yeah. I think in a nutshell, the best way to think about Jane Street is that we're a quantitative trading firm, obviously, but we're a liquidity provider at the end of the day, and we provide liquidity, i.e., make markets in ETFs, options, ADRs, equities, fixed income, and even, to some degree, digital assets, have helped in that space as well. We've become this big player in terms of making sure that markets are working efficiently and orderly.

Doug Yones:

Very good, thank you, high level. We got to dig deeper though, right, because... What's happening day to day, right? As we're recording, I can see, visually, behind you, you've got the whole giant warehouse-sized room of ETF traders. What are people doing? Are they putting up capital? Are they trading alongside clients? Are they helping them with agency? What are people doing day to day?

Ugo Egbunike:

It's a little bit of all the above. I think the best way to think about Jane Street is in two arms of the firm. There is JSC, which is our proprietary trading arm of the firm, that's using our own capital to make markets and ETFs, and to trade across a variant amount of products. And then, you've got JSES, or Jane Street Execution Services, which is the institutional arm of the firm. That's the part of the firm that faces clients directly, works with ETF issuers, and then helps bring those trading solutions from the prop side over to our clients.

Doug Yones:

Okay. And then, for you personally, your team, you're out of the road quite a bit, I see you. If you're on the road, is somebody, at back of the desk, taking care of the business for you, or what are you doing daily?

Ugo Egbunike:

Yeah. We've got a very well-staffed desk on our institutional side of sales traders, and sales executives as well, that are working with clients on a day-to-day basis, and making sure that they're connected to that liquidity. And then, on the proprietary trading side, of course, we've got technologists, traders, folks are working on the operations desk, to make sure that trades are properly being booked, and to, essentially, make sure that the machine is well-oiled and run. At the end of the day, it's a 24-hour effort, not only in the New York office, but London, Amsterdam, Hong Kong, and then Singapore.

The firm operates from what we call our central risk book. And at the end of the day, no single Jane Street trader has their own book. It's really considered to be one book across the firm. And when we think about pricing these various products, we're thinking about the correlations across the different asset classes, and what the implications are for the prices of these products that are trading globally. When you see, or... You have this picture of these traders behind me working, everybody's coming in as a team, and pricing their respect to products, but also thinking about what the knock on effects are.

Doug Yones:

And for those listening in, if you have this picture in mind, of this Wall Street vision... Unfortunately, it comes from movies that's probably not accurate, at all, anymore. Maybe it was accurate in the eighties before I got here. I don't know. No joke, my very first visit to the Jane Street office, it wasn't the one you're in, Ugo, but... The first thing that I was offered was, "Welcome. Hey, would you like an ice cream sandwich?" No joke. And I think that, to me... I tell that story, one, because, of course, it's humorous, because I was coming in from Pennsylvania, and I'm finally on Wall Street, and I'm doing this big meeting. And the person at the front is greeting me with a smile and an ice cream sandwich. And I think that is very enigmatic of the change of the world you live in, the people you work with all across the world. I have spent time with them in the various offices. You're all super friendly, super nice, and super into what you do. Did you know that coming in... When you thought about your career, did you think it would be like that? Did you think that it would be friends first?

Ugo Egbunike:

I didn't necessarily think it would be like that. I think when I look at the beginning of my own career, personally, I didn't even plan to, really, stay on Wall Street. Wall Street was just a means of saving money. If anything, I almost braced myself to take on a little bit of abuse, knowing that, all right, the end goal is to save up some money and go to medical school. But it was later on in my career, that I heard about this firm called Jane Street, read a lot about their culture. And I was like, "Oh, there is a model for how this could work." Obviously, the financial services industry is one that can be quite stressful, but that aside, you want to work in a place where folks are intellectually curious, interested in solving problems, but doing so as a team. And I think we've mastered that art of balancing these two worlds of, yes, we want to be sharp in our pricing, we want to make sure that we're thinking about things deeply and doing things the right way. But it doesn't mean that you can't work in a collaborative manner while also still being competitive. And I think we do a really good job of striking that balance here.

Doug Yones:

Okay. Take me back to 10-year-old Ugo, are you thinking about medical school at 10 years old? Let's go to the way, way back.

Ugo Egbunike:

Okay, so we're going way, way back.

Doug Yones:

How did we get here? Yeah.

Ugo Egbunike:

10-year-old Ugo, in the mid to late nineties, if you ask him, "What are you going to be when you grow up?" Both of his parents are behind him, and they're both physicians. And the immediate thing he's going to say to you is, "I'm going to be a doctor like mommy and daddy." And that's it. That was the straight answer. And that was the same answer through about junior year of college. But I got to college, which was Bowdoin College in Maine, I started to see friends that were, of course, applying for internships. And the one internship that stuck out at the time was going into investment banking. And I was like, "All right. This is something that you could do over summer." Saved some money. I wasn't necessarily, at the time, really interested in going deep in the Wall Street, but I was interested in it, from an intellectual curiosity perspective of... Understanding how markets operate, the effective allocation of capital.

Even my parents, they'd both run their own private practices. And I would say, from that perspective, they were really great at being doctors, but when it came to the actual business aspect of it, they were always outsourcing. That was something always in the back of my mind, where I thought, hey, I'd like to understand that aspect of running my own practice one day. And I think that led to my interest in capital markets and economics, and how things work out. Yeah. I ended up majoring in economics. And then, all my pre-med courses that I'd taken, I wrapped up, and just focused on chem at the time, but economics was my official major.

Doug Yones:

That's one hell of an internship. What type of doctor were you thinking you might be?

Ugo Egbunike:

Oh, anesthesiologist.

Doug Yones:

Okay. You're headed towards anesthesiology, and then you go into... Where was this magical internship? Was it like an eighties Wall Street movie, where you met some person, or persons, and you said, "No, I got to go do this?"

Ugo Egbunike:

The funny thing is, come internship time, the 2007, 2008 financial crisis is starting to unravel. So, A lot of these internships that were available, all of a sudden, started to become more and more sparse. Where I did end up working funny enough was at an insurer in Maine, in their underwriting department, working with their actuaries. That insurer was Unum. I did that for a summer, and saw the other side, I guess, what we termed from our side of the industry as the asset owner side. So, understanding how an insurance company works in terms of writing policies, gathering those assets, and then investing those assets, and how the actuaries are thinking about the risks that they're taking on. And if anything, at the time, we got some exposure to their internal investment team managing their GA. That also struck this curiosity in me, where I was like, "Wow, this is such a significant component of how the financial markets work in that." Yeah, you have this trading and investment in banking angle, but...

Even your everyday insurer has to be, in some ways, clued in to what's going on on that side, because that directly affects their pricing. That affects how they write their policies in terms of understanding what their expected returns would look like. That kept my interest going. And then, come my senior year, as the financial crisis is unraveling, not a lot of investment banks were, obviously, hiring. At the time, Bear Stearns would come on campus, Lehman Brothers was a big hirer. And these were all the banks that were, at the time, going under. But there were a few firms hiring, and it was on the trading side. If you think about what volatility looked like at that time, not everybody was really suffering. And one of the firms that, luckily, was recruiting on campus was Kellogg Capital Markets. And Kellogg, at the time, was a significant lead market maker across the ETF space, and was providing seed capital to new ETF issuers coming to market. That was my first exposure to this ETF market and what it was.

And I remember studying for my first round interviews, and just, at the time, reading nothing but Yahoo Finance articles, because that was the best thing out on ETFs, trying to understand how this wrapper worked, why it differed from mutual funds, why it was growing, why investors were seeking it out. And I was like, "Oh, this is fairly interesting." I think the one thing that kept me engaged and excited about this space was that, in a weird way, it felt like ETFs were this gateway to democratizing markets, where, virtually, anybody that had access to a brokerage account could invest as little as a few hundred dollars and get exposure to, say, the S&P 500.

And I found that really compelling, because I... I think, people have to remember, if you look at the early nineties, and you wanted to invest in markets back when stocks were still trading infractions, you had to have a guy, you had to have a broker. And usually, it was a guy too. Even that tells you how archaic things were, right? You had this broker in New York, and he would tell you what the hot stock, or the hot equity was, that you should be involved in. But the sense of investing in a diversified basket, through a low cost product and tool, via the ETF, was something that was new to me. And it was really nice to see. And then I was like, "Oh wow, there might be a career in making markets on these products." It's definitely something that piqued my interest.

Doug Yones:

I got to ask, what's that going back home and saying, "Hey mom, hey dad, I know you're both doctors, and I was going to be a doctor, I'm going to go be a trader on Wall Street." What was the reaction to that?

Ugo Egbunike:

In my mom's mind, she's like, "I don't know about this plan." She was very concerned. I think my dad trusted me more at the time because... To some extent, even when I was a kid, I was always trading something, so he knew. Even in the summers, where I would help out at my dad's private practice, all I did was read econ books in the stockroom. He knew that I had this interest, and my mom was more so worried about, what does the career path look like, right? It's very easy to say, "All right, if I'm going down the medicine route, going to medical school, and then I'll go and do residency, and a few fellowships, and before you know it, I'll be an anesthesiologist." But she didn't really, necessarily, understand the pathway of what a career looked like for a market maker, so it was hard for her to digest. But luckily enough, I had a job in New York, in the middle of a financial crisis. I think that was encouraging for her. And she was like, "All right, you'll probably figure it out."

Doug Yones:

Listen, I won't put you on the spot, to ask if you've done this, but if you haven't, you should invite her to the offices, offer her an ice cream sandwich right away. I got to tell you, it really takes the walls down, and it gets people happy. Nobody turns down ice cream sandwiches, especially in the summer in New York City. So, you're at Kellogg. Kellogg, of course, historical, in the fact that they've spun out people across this entire industry. Some of our true leaders that run liquidity across all ETFs at a number of different firms, really, you got their start at Kellogg. Was there a spot though, at Kellogg, where you said, "Hey, I know I'm looking at the ETF industry, and maybe I'm still thinking about insurance in the back of my mind, but no, this is it. This is the aha moment. I have to go be ETFs?"

Ugo Egbunike:

Yeah. I think the aha moment was seeing the sheer amount of products that were coming to market, via Kellogg and what we were seeding. I remember helping out with the first Egypt ETF, and seeing how that launched. I remember some of... In particular, the VanEck ETFs that were launching, the Index IQ products that were launching. Just the sheer amount of innovation that was going on around me at the time, introducing me not only to new asset classes, looking at that, going from equity to fixed income, but different strategies coming to market at the time. And that, to me, signaled, "Wow, this is not only growing, but it's a competitive market." Because at the same time that you had this innovation, you still saw what was the beginning of this expense ratio, fee wars going on. Someone would release a product, and immediately, you'd see an issuer respond by reducing the expense ratio on that product. And that was cool, because if you go back and think about it from an economic sense, it showed you this marketplace at work, in real time, competing for capital, and competing for assets. And that hooked me in.

Doug Yones:

Of course, now at Jane Street, you help, really, run a lot of the internship program. You get a chance to speak to a lot of young people. I know you do mentoring. When you take a a backward look, or a rearview look, and you sit across your desk, are there pieces of advice or... Somebody who says to you, "Hey, I want to make this a similar journey," or "I want to try to figure out my own successful way into this ETF industry," what do you usually tell them?

Ugo Egbunike:

I think the biggest thing is being, and continuing to be, intellectually curious. I'll go into my background a bit. When I was looking at finance, in college, there was a sense that, especially for investment banking, you had to have things down. You went to your Excel classes, you needed to be able to spit out a discounted cashflow model, within 30 minutes, of a company of your choice, and these hard skills, where it's really focused on how to do the role, as opposed to understanding how things worked in a broader sense. And I think that put me at a disadvantage, initially, and it's a deeply contrasting way of looking at things, versus how we hire at Jane Street, where we don't care if you have a previous background in finance. If anything, some of those preconceptions of how the world should work sometimes might hinder you. What we care about is that you have intellectual curiosity. There's a number of senior traders here at the firm, that have traded new asset classes, and had absolutely no priors in those asset classes.

What it leads them to do is to come onto a new desk, or come into a new area of the firm, and ask the simple questions, and then ask, why is that the case? And it helps to break down some of the assumptions, and it's breaking down those assumptions that, oftentimes, you will find new ways of figuring things out, or solving puzzles. That, by far, I think, is probably the most important skill to have, if you're a student coming out of college, or someone looking at the field. By all means, do not assume that what you're being taught is law. If anything, I want you to question everything. And going back to 2008, 2009, 2007, the mortgage market is a great example, right? Mortgages aren't supposed to fail. Mortgage pools are diversified products. And then, look at how that turned out out. By far, I think that's the greatest skill set, is just to be intellectually curious, and to really question everything.

Doug Yones:

You guys, Jane Street in general, right, tend to be in the press. I know this year, for whatever reason, you got a lot of press around your internship program. I don't know if it was because of the size of the class, or the difficulty getting into the class. Given what you just said, for those that, maybe, are in college right now, or maybe they are elsewhere in the industry, and they're thinking, hey, I want to try and get in, what should they be, I guess, focusing on, if they're trying to fight their way through that crowd, and get some attention from you and the rest of the team at Jane Street?

Ugo Egbunike:

Yeah. Look, we've definitely grown the internship program. And it's one of those things that, obviously, is competitive. Just because you get, or what might seem like, a rejection from Jane Street, the first time, doesn't mean you can't apply again. And also, I think part of it is, a lot of times, when we do reject applicants, it's not because they don't qualify, because we want you to be more exposed. So, still that concept of intellectual curiosity. Whether it's taking certain classes or broadening your exposure to STEM classes is incredibly helpful. A lot of times, you'll see, for our intern class, there are folks that applied their sophomore year, where their junior year is, actually, the year that they get in. I would say the thing that helps the most is, again, continuing with that theme of intellectual curiosity, but making sure that you're exposed to a number of different disciplines.

Doug Yones:

Let me just summarize, I guess, where we're headed with this consulting piece. Are there very specific pieces or issues, or... Where are you spending most of your time when you're talking to firms that are thinking about entering the industry right now?

Ugo Egbunike:

I think the big thing is, you have a lot of traditional asset managers that are now looking at the ETF wrapper as a new product that they should really embrace. The issue that we typically run into is that you have seasoned portfolio managers that have no experience with the creation redemption mechanism. These are folks that have mostly been dealing with cash inflows and outflows. They see the benefits of using the creation redemption process, i.e., taking in underlying assets in-kind, in exchange for ETF shares, and then being able to put out those underlying assets when folks are redeeming shares at the ETF. But there's always still a lot of skittishness. They don't want to get it wrong, and rightfully so. So, a lot of the time that we spend is, one, educating PMs on that process, particularly within the fixed income space, which... We all know fixed income is a little bit of a... A hairier asset class to deal with inequities, but getting them used to that process of the creation redemption mechanism, particularly when it comes to custom in-kind baskets.

So there are times that market makers might be asked, by PMs, to deliver portfolios that maybe don't necessarily resemble the fund 100%, because they're using it as a means of gaining the exposure that they actually want in the fund. Those nuances are things that we try to help folks understand, in terms of how to utilize our inventory as market makers, when it might be beneficial for them. Ultimately, at the end of the day, the PMs and the issuers understand that they have the optionality, when they're looking at our inventory, to manage this creation redemption process. But if you're coming out of a world, where you were just taking in cash, putting it to work, and then going into cash, can be a little bit daunting, so we do hold a lot of hands with that respect. And then from there, it's a matter of understanding, all right, what's going to be your distribution strategy around this product?

Let's say you brought over a strategy that used to sit in a separately managed account, or used to sit in a mutual fund. It's great. You want to have an ETF. But having an ETF does not mean that investors are going to show up tomorrow. How are you going to put this out in front of investors? Who are the types of investors that you're targeting? Are you targeting RIAs, ETF strategists that might be managing models? Are you targeting folks within the asset owner community, endowments, pensions? How are you going to get this in front of them? Why should this help them with regards to their own asset allocation? So, really quizzing them in terms of understanding their product placement relative to the competitive landscape, and then making sure that they're thinking about things in the right manner.

Doug Yones:

Yeah. And for those that are tracking this year, 75% of all ETF launches this year. And by the way, a record year, we have broken the record in total number of launches ever, in a single year, this year, for 2023. Most of those are active, and these are brand new active managers. I know here at the New York Stock Exchange, I think we've launched over 60 brand new asset managers this year, never had an ETF before. There's lots of questions. As you just heard from Ugo, the team at Jane Street are there, they're there to help you. They're just like we are here, at the New York Stock Exchange. We want to engage. If you're listening in, and you're thinking about entering the business, please reach out to us.

We want to help you in advance, walk you through all these scenarios, all these steps, piece by piece, and then start to hit on all the parts that, I think, Ugo mentioned. Because that could be the difference between success or failure in the ETF industry. When you do meet with firms, Ugo, and they start to give you those answers to those questions, I don't know how to say it, are there right answers and wrong answers, particularly around the distribution strategy, or... How are you playing that all in when you're making decisions of, is this the ETF I want to be the lead market maker for? Is this the ETF that, maybe, I want to put C capital towards? I guess that's it. Are there wrong answers?

Ugo Egbunike:

Yeah. I think the wrong answer is, first, not having an answer. And you'll be surprised how often folks will come to us and think, I have this great idea for an ETF, and that that's automatically going to generate assets. You might have a great idea, not to say that we don't see a bunch of great ideas, but ideas and distribution are two completely separate things. Just the fact that you might, at least, have an answer for distribution shows that you've thought about it. There are some things that, I would say, folks shouldn't have an assumption around. The assumption that because you've had a relationship with the wirehouse platform, say, the Merrill, the UBSs, the Fidelities of the world, that you'll automatically get approval, not necessarily the case. You still want to show that you've done the thinking about what it looks like on the ground, what's your strategy to get in front of independent RIAs, maybe what's your strategy to get in front of institutional clients on the larger end, that maybe might serve as anchor tenants, because this is a strategy that already fits a service that they're getting from you, as an asset manager.

But it's nice to see when folks think about these things, and then have plans on the side, in order to address when they might run into speed bumps. Because I think it's very easy to come to a market maker, or to the exchange and say, "Yeah, we've got this great idea. We need $2.5 million of seed capital. When are you going to take us out of seed capital?" No sense yet, but we're having a lot of great conversations with who, and why. So, getting to those second order questions, in terms of understanding, "All right, you're going to take us out of seed capital. You need to commit to a date as to when you're going to take us out of seed capital. And where are those assets coming from? And then, what are going to be the follow on assets that follow from that? Who are the folks that you're going to be in front of? Why are they going to be in that product? And what are they selling to get into that product?" And really forcing them to think about how their fund is going to operate within this broader ecosystem.

Doug Yones:

Yeah. And you bring up a great point, and that has been, I think, a trend here at the New York Stock Exchange for the last, probably, two or three years, which is, I like your label, anchor tenant, but other people say, "Bring your own assets," or "Bring your own client." But the idea that you have some investors behind you, or some amount of assets behind you, that they believe in the strategy, they want to be there, they will stay on long-term, it gets you over the hump of your C capital. It, potentially, gets you into a breakeven, or beyond breakeven, right out of the gate.

And we're seeing more and more of that. Again, happy to engage in conversation about some of those best practices for people that are out there. Let's talk a little trading. You're sitting on the trading desk. I guess I'll ask at all angles, but maybe you're meeting with an institution, or you're meeting with an RIA, and they say, "Hey, can you help me with my execution strategies? Are there best practices for trading ETFs? And does some of the answers change if we look at fixed income versus equity, versus commodity?" If I start to bounce around, are there tried-and-true across all asset classes, or do we have to look across individuals?

Ugo Egbunike:

There are some tried-and-true across all asset classes, I'll start and say that. Usually, when we're talking to institutional clients, there are clients that are of a size, where it makes sense to have a conversation with us, meaning that they have the ability to trade directly with us. Their flows aren't necessarily captive to a custodian, so if you're on a custodial platform, maybe it ends up... That trade, when you put in the request to make a trade, is going through that custodian's block desk. And then, that would be the desk that we're working with. And they have discretion as to how the trade will be executed. But in the case, when a client has the ability, say, to directly access the market, the simplest piece of advice I would give is to say, "Please, always, always, always use limit orders."

Oftentimes, when an ETF is sold by a salesperson, and they're talking to an advisor, they hear about that T, in exchange traded fund. And they're like, "Oh, okay, trades like a stock. When I buy Apple, I just shoot in the market order, and let it run. And I'll accept whatever price I get because there's deep liquidity there." It's a little bit different when it comes to the ETF wrapper. Certainly, as market makers, we do our best to make sure that we're providing a decent amount of liquidity on the books, but the important thing to remember is that there's this other existing layer of liquidity that sits within the underlying asset class of the ETF. And by nature of the ability for us to create and redeem shares of that ETF, we're not showing all the liquidity that's available on screens 100% of the time.

The way to access that is either by working with us, if you're of a certain size, or if not, just simply put in the limit order. And what that does is, even if your order doesn't get executed immediately, a market maker will see that, hit screens, and then decide on whether to engage. And it's much easier to put in a limit order, say, at the offer, that gets filled within a few seconds, as opposed to putting through a market order that, maybe, might just run through the book for that particular ETF. And it's not necessarily best execution if it's hitting levels that don't necessarily represent, or fair value, for that ETF is. First step, by and far, please use limit orders. From there on, I would say, when it comes to institutional clients working with us, there's a number of options, at bay. That are available to them, when it comes to working directly with liquidity providers, like ourselves.

A lot of times, we can set up lines with folks directly, where they're coming to us over, say, a Bloomberg chat, or IB, sometimes, we're just setting up fixed connections, where they can automatically send the orders into us, or they're operating and trading with us via various platforms. You've got a number of different RFQ protocols that are available now, or they might come out to us direct, or even put us in competition with other market makers, which we're totally fine with, and frankly, we do encourage, from time to time. But the number of ways that institutional clients will trade include asking outright for a risk market and an ETF. If you don't necessarily want to show your hand, you can say, "Show me a two-way offer in this particular ETF." And we'll show a bid and an offer for the size of your choice. Another way that folks will engage is by using some of the, traditionally, equity order types. You can VWAP it, you can GVWAP it. That's using the volume weighted average price as a benchmark.

Of course, closing orders are also an option, right? They're guaranteed GMOCs, or guaranteed market on close orders, that they can utilize. And then, within the ETF space, there's also NAV-based trading. We can offer you a price on an ETF, based on its future NAV, and quoted at an offset to that NAV. If you're coming in, and you're really concerned about your execution quality, relative to the net asset value of that ETF, you could say, "Hey, I'd like an offer for NAV, on this particular ETF." And we might say something like, "We'd be willing to sell you this for your size at NAV, plus five VIPs." All that to say, there's a number of options available to institutional investors. But by and large, I would say, probably, around 70% of the order flow that we do see from institutional investors is via risk market. So, they're coming in, they're receiving a price from us, they're immediately engaging, and they know exactly what their net proceeds are, from that transaction.

Doug Yones:

I have to ask you, Ugo, you talk to a lot of issuers, you watch them come to the market, they've maybe gone through your distribution plan, do you feel like you could look back and say, "Hey, across the..." Folks that have been successful, and then on the other side, the folks who haven't, are there best practices, or common themes in your mind, that say, "Hey, here are the things that..." If somebody's listening in now, and saying, "Hey, I'm going to launch my ETF business this year. 2024 is my year." What should they be focused on?

Ugo Egbunike:

I think the big thing is understanding if it's a product that, maybe, is slightly different than the product offering on the market, understanding how you stand out relative to the competitive landscape. And a big thing about that, or a big component to that, is looking at 13F filings. Who are the large players that are in those products that you're going to be ending up competing with? Have those products performed to an extent, where, maybe, there might be a tax loss harvesting opportunity for them to sell out of that ETF and move into yours, or maybe your ETF might even compliment ETFs that those institutional clients are currently holding. It's really refreshing to see, when a new ETF issue is coming to market, having done some of that research to look at the traditional holders that are operating within their space, and then, from there, just developing or, really, building out their target list of sales clients, or buy-side clients to go after.

Doug Yones:

I am going to surprise you now, because... You might not remember our conversation, Ugo, but we had a conversation at the exchange conference last year, Miami, February, and we were talking about the markets. Do you remember this? I said, "Do you think the markets are going to be higher or lower by the end of the year?" And we went round and round, and I said, "I think the markets are going to be up about 20% for the year." And you said I was crazy.

Ugo Egbunike:

Yeah. I owe you something. I don't know what

Doug Yones:

Here's what you owe me. I'm giving the audience the backdrop, but he's not the best guesser out there. The reality is, you do sit at the intersection of all the markets, you see everything going on. And we had a nice year of... We're going into the end of the year here, with a massive rally. 2024, I'm hoping you'll give me a crystal ball. What should an investor advisor... When they're looking at the markets, what should they be thinking about? I'll let you decide if you want to decide if the markets are up or down in 2024. That's a hard discussion. But there are things that they should be thinking about, for 2024. What do you look at for the year?

Ugo Egbunike:

I think, for 2024, it's definitely a game of proper diversification. You look at a number of the strategies that are out there, especially the buffer ETFs that are offering this... More greater sense of downside protection. I'm a simple person at the end of the day. I like a good 60/40 portfolio. From that sense, I think same, properly diversified is key. That being said, in 2024, we're definitely, probably going to see some product offerings that are going to open up that efficient frontier of what's available to investors. Clearly, there's a lot of excitement around digital assets, and the potential for that to be seen, from a spot perspective, in the US. I would say, from a buy-side investor's perspective, it's really key to just understand what your exposure should be, from a diversified sense. I do think there's just a ton of excitement out there for these products, but it really is a matter of, what does this look like fitting relative to the broader exposure that I have in my portfolio. Yeah. Not making any direct bets on anything in particular, but it's about slow and steady.

Doug Yones:

Yeah. Slow and steady wins the race, I would agree 100%. And if anyone knows me and my background, 17 years at Vanguard, I think I read every single book written by Jack Bogle. And if it wasn't for the team at Vanguard teaching me to take it slow and steady, and diversified, I can promise I wouldn't be where I am today. And I've got kids going into college. Guess what? I'm one of the few people not panicked, because I took Ugo's advice many, many years ago, and built a nice, steady portfolio. But listen, there's something to be said about the excitement that a Bitcoin ETF brings to our market.

At minimum, it raises a lot of eyeballs to think about investing, to think about ETFs. And yeah, maybe there's some emotional value, that I've always said to my friends, of, if you want to take a small portion of your portfolio and get excited about something, and that's what leads you to then invest, and invest for your future, and build a big strategic portfolio, then, by all means, that's the perfect entry point. I'm pretty excited too. I told you I thought the markets will be up this year. So far, we got a few more days, I think I'm right. I think we'll see a Bitcoin ETF next year, alongside a lot more ETFs, because the pipeline continues to be strong. When you look out at the marketplace, Ugo, do you have a favorite ETF?

Ugo Egbunike:

Favorite ETF.

Doug Yones:

Or a favorite ticker?

Ugo Egbunike:

I think my personal favorite ticker is still SPY. It's the first, right? You have to give credit to the first.

Doug Yones:

Got to give credit. 30-year anniversary this year, big year for SPY.

Ugo Egbunike:

30-year anniversary. But also, it wasn't a success on day one. It's going back to that slow and steady mantra. It was, really, just a means of generating more volume on the floor of the American Stock Exchange. They came up with what, at the time, seemed like a kooky product. And look at the space now.

Doug Yones:

Yeah. For sure. For sure. I think, we could easily say the most, well-known ETF in the world, I think that's probably a fair statement.

Ugo Egbunike:

Absolutely.

Doug Yones:

Someone can fact-check us on that, but I feel pretty confident. Feel free to hit us on LinkedIn and let us know. Ugo, for ETF issuers that are, maybe, asset managers today, but thinking about being ETF issuers in the future, how should they be thinking about Jane Street? How should they be engaging, or not engaging? How should they be coming and talking to you?

Ugo Egbunike:

Yeah. We definitely appreciate having conversations earlier, rather than sooner. I think the bigger mistake that folks make is that they think about market makers, or liquidity providers, sometimes, last, and they'll say, "Oh, we don't want to bother them." Until a few weeks before listing because "We're working on product development. We're working with the PMs. We're trying to set up our internal ETF capital markets teams." And the fact of the matter is, this is a group effort across the industry. To the extent that you're already having conversations with folks at the exchange, that you're already having conversations with fund administrators, it's okay to include us as market makers as well. And a lot of times too, going back to what I was saying earlier about interfacing directly with the portfolio managers at a number of these funds, it takes a bit to get up to speed, to understand how the primary markets should work when it comes to creations and redemptions.

And we want to make sure that folks are comfortable, and have built a rapport with our team, such that when, hopefully, what amounts to fund and flows come into the ETF, these PMs feel comfortable to focus on the ETF capital markets desk, feel comfortable in understanding how to handle not only the creations or redemptions, but what am I interpreting when I'm looking at screens, and looking at bid as spreads? How do we get a product to penny wide spreads, which is the goal of every ETF issuer, with not them understanding that... A lot of times, when you're seeing penny wide spreads, it's not necessarily that it's one market maker. It's a number of market makers competing. Frankly, at the end of the day, that boils down to distribution. Even to the extent where there might be partnerships between our institutional team, and the sales teams at these respective new issuers, we want to be open and have those conversations. Certainly, by all means, please get us involved earlier, as opposed to later. And we're more than happy, at the least, to point you in the right direction, if we can't help with some of those answers.

Doug Yones:

Yeah. And for sure, if that hasn't come through in this conversation... I don't know what to tell you, but I can highly recommend, stop by one of Jane Street's offices anywhere in the world. Shout out to Teddy and the team in Hong Kong. I've known them a really long time. The Jane Street team is so friendly, so helpful. They're trading ETFs in every domicile across the whole world, every single day, and are willing to share best practices for being successful. Ugo, I want to say thank you again for joining here today. For anyone who will be at the ETF conference, the exchange in Miami, come find Ugo. Top 10 best ETF hugs, best smile out there. Go find him and Kaidy, and the team, in Florida, or come visit us as well, at the New York Stock Exchange. We'll be there. We'll be engaging.

That is a wrap on today's edition of ETF Central's The Podcast. As a reminder, you can find this episode, all the other episodes. You can use that free ETF screener all at the website, etfcentral.com. You can also become a CETF, a certified ETF advisor. It's a FINRA designation. CETF, I have it. You should go get it. Go to etfcentral.com. Thanks again, Ugo, for taking your time, being here to share your insights, and to predict the future for 2024. It's always appreciated. Stay tuned for upcoming episodes featuring other thought leaders from across the ETF ecosystem. I'm Douglas Yones, Head of Exchange Traded Funds at the New York Stock Exchange, the home of ETFs.