Most readers on ETF Stream will be very familiar with the mechanics of the ETF structure and the participants involved in bringing it together. However, the one question I most frequently get asked from those less familiar with ETFs is what is the purpose of the capital markets function, what do those people responsible for the E and the T part of ETFs do? At the end of the day that is the most obvious difference between ETFs and mutual funds.

So, I thought let us dig into this a bit for this month’s article.

What are the responsibilities of the capital markets function?

You could say that the capital markets function is a bit of a jack of all trades, role. You need to understand trading, operations, product development and sales, so an understanding of the mechanics of each role is of paramount importance. In effect, you are the link between all participants within the ETF ecosystem.

All providers structure themselves slightly different depending on their size and the resources at their disposal. Some firms have teams in excess of 10 people dedicated to the function, whilst others have a single person. It is a horses for courses approach really.

However, you could break down the function into the following main responsibilities:

  • Facilitating the creation and redemption process – ensuring clients trade in and out of ETFs in the most efficient and cost effective way possible
  • Relationship management – engaging with authorised participants (APs) and market makers to ensure the provision of liquidity and tightness of spreads is being constantly maintained
  • Sales support – educating clients on the mechanics and best practice for ETF trading

What skill sets do you need to have to work in capital markets?

Being a bit of a jack of all trade’s role, it may be unsurprising to hear that people from various backgrounds end up making their way onto the capital markets desk. A background in trading or from an exchange is not uncommon but you will also find people with an operations and sales background. I recently heard of one firm hire someone with a compliance background.

A good mix of attention to detail, interpersonal skills and knowledge of the markets is usually a good starting point for anyone looking to get into this space. Also, considering the fact we are churning through more and more data as time goes by, a computer science background is becoming more appealing. I do not think capital markets people are going to have to turn into Python coders going forward but it is a useful skillset, nonetheless.

What impact will technology have on the role going forward?

Every role in our industry is now subject to the impact of technological change and capital markets is definitely no exception. Anyone who thinks otherwise may be in for a rude shock. But what changes can we expect?

The low hanging fruit is obviously in terms processes around PCF production and oversight, monitoring of spreads and the more labour-intensive tasks that I am sure every capital markets person would be glad to see the back of. As you have no doubt gathered by now the role is very relationship management focused so the days where clients are facing off to a capital markets chatbot may still be a little bit in the distance.

Is capital markets going to be a role in demand as the ETF industry grows?

As the industry continues to grow there is no doubt, we will see new participants enter the market, be they start-ups, fintech firms or traditional mutual fund managers looking to claim a stake to the ETF pie.

All of that is very good news for those in a capital markets role. It is a unique role within asset management and there are only so many people out there with the skills and experience to perform it. Plus, it is the one cog in the asset management wheel that the traditional mutual fund managers do not understand. I would argue that operations, product and sales are all transferrable skills from the mutual fund world but not capital markets.

That is why there is a premium for such roles now. Anyone who saw my recent ETF salary survey will attest to that.

Furthermore, having observed a number of asset management firms come to market over the last two years I can say with confidence that a capital markets hire is usually the first role firms are looking to fill.

So, if you are reading this and you work in a capital markets role, sit tight.

Could the function be outsourced to a third-party specialist?

Whilst the above all sounds great news for those currently working in the function, I would like to offer an alternative view of the future. Outsourcing the function is not a new idea and it has been mentioned in the past, but could it work in practice?

The frequent pushback I hear when I ask this question is

  1. It would be impossible to manage the conflicts of interest
  2. You need to have a really good understanding of the products to perform the role properly
  3. There is too much client engagement in the role and firms won’t want to outsource their client interaction

All of those are valid reasons but firms are managing conflict all the time and there are plenty of asset managers who use third-party distributors to sell their funds. It might not be suitable for all firms and a third-party specialist may not necessarily take on all aspects of the role but I can see the appeal for new asset managers looking to enter the market, be willing to take a look at this, especially considering what we have already discussed i.e. it is the one piece that they do not understand.

View From The Desk: How the ETF industry has adapted to a new way of working

Someone to have spotted this opportunity is ETF industry veteran, David Abner who now runs Dabner Capital Partners. Abner thinks that the capital markets function is ripe for outsourcing and innovation, believing it has become a major cost centre at ETF issuers. His firm is the first of its kind to offer an outsourced capital markets service, as he says “we are looking to plug the knowledge gap for new entrants coming to market and help the trading community ensure smooth and seamless liquidity”.

Only time will tell whether such a service proves successful, but sometimes it is the most contrarian ideas that succeed the best, so have an open mind.

View From The Desk is a new series where Michael O'Riordan, founding partner of Blackwater Search, a specialist ETF and digital asset executive search firm, examines the key trends taking place across the European ETF industry from a people's perspective.