Executing a Large ETF Order Around the SARON Publication
At 10:15 a client relationship manager at a SIX member firm receives an order from a pension fund to buy CHF 25 million of a CHF-denominated ETF that tracks short-term SARON-linked Swiss government bills. The ETF's average daily on-exchange volume is CHF 4 million. The client marks the order 'immediate' but also says best execution is required. The firm's prop desk already holds CHF 3 million of the same ETF. The trader knows that the ETF's indicative NAV is calculated at 17:30 using the official SARON publication, and that a large market-on-close order could move the closing price. The trader considers three options: execute the entire order at market on SIX now, work the order through the day with limit orders, or arrange an off-book block with a market maker and print it on SIX. The firm's compliance manual requires client orders to be executed on terms most favourable to the client and prohibits proprietary trading ahead of client orders.
1. Identify the main order-handling and market-conduct risks in each of the three execution options.
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Executing the entire CHF 25 million at market against CHF 4 million average daily volume would likely cause significant market impact and a poor average price, which conflicts with best execution even if speed is achieved. It also risks moving the closing price if timed near the close. Working the order with limit orders reduces impact and shows patience, but the client may not be filled promptly and the order could be left exposed to price moves. An off-book block with a market maker may deliver price improvement and less impact, but it must be reported promptly, must not disadvantage other clients, and must be assessed for best execution against on-venue alternatives. Across all options, the prop desk's existing CHF 3 million position creates a conflict: any proprietary trading ahead of the client order would be front-running and a serious market-conduct breach. Trading near the 17:30 NAV calculation also raises the risk of manipulating the closing price or trading on order information.
2. Recommend an execution approach and the controls you would put in place.
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I would not execute the full amount at market. I would start with a limit order or a participation algorithm with strict price limits, and simultaneously test a block with a market maker. The block should be used only if the executed price is at least as favourable as the expected on-venue alternative after costs, and it must be printed on SIX in line with the exchange's rules. The order should be worked away from the 17:30 close to avoid any appearance of marking the close. The prop desk should be wall-crossed and prohibited from trading the ETF until the client order is complete; compliance should pre-clear any proprietary activity. The trader should document the best-execution rationale, including speed, price, likelihood of execution, and market impact. The client should be informed if the order cannot be completed immediately, and any conflict of interest should be disclosed and managed.