For big institutional investors, whose orders might move the share price, the market maker plays a more active role. Instead of purchasing ETF shares on the exchange for the client, it buys up a representative slice of the fund’s underlying stocks or bonds -- if it doesn’t already hold them -- and presents them to the ETF. The fund hands over newly created shares priced at its net asset value. Selling large blocks of shares works the same way, in reverse.

Quoting Prices

The challenge for Browne’s team lies in the obligation to quote a price to its client when the order is taken. Say a hedge fund wants to put $20 million into junk bonds through State Street’s SPDR Barclays High Yield Bond ETF, which holds about 700 underlying bonds. If Cantor doesn’t own those bonds, its traders have to estimate how much it will cost to buy them, which can take a day. If they hold the securities in inventory, prices may already have diverged from what they paid, and they may have spent money to hedge those positions. The trader taking the call must set a price that covers costs, protects against price shifts before the transaction settles and allows for an acceptable level of profit. He or she has about 45 seconds to do so.

Set the spread too thin and the firm loses money. Set it too wide and the client, who can also monitor the prices of all the securities involved, will look for a better deal elsewhere. Among Browne’s competitors: Goldman Sachs Group Inc. and KCG, which is rebuilding after Browne’s exit.

Systemic Worries

When it comes to backing new ETFs, most of Browne’s calculations revolve around the risk its sponsorship could pose to his own firm. Systemic worries -- for instance, whether an asset class is big enough and has enough underlying liquidity to support an ETF -- he leaves to the SEC, which must approve all new ETF listings.

“Regulators make the decision on whether an ETF poses too much risk to a certain asset class,” Browne says. “I’d argue that we bring more people to a market, more transparency, and that can bring equilibrium to pricing.”

The risks he takes backing new funds don’t always work out. One product he got behind in 2013 was the Barron’s 400 ETF, which tracks an index that picks stocks that are filtered through a formula based on growth, profitability and cash flow. It’s a strategy even Browne wasn’t sure would gather much interest. The fund now holds about $207 million and was up 15 percent through Feb. 10 since its opening June 4.

Then there’s the Nashville Area ETF, a fund he backed that is composed of companies based in or near Music City and that started Aug. 1. Browne saw the fund as the first of a series of ETFs designed to tap interest in regional U.S. investment strategies. Yet as of mid-February, it was languishing with $6.5 million in assets, and it had a 0.8 percent return as of Feb. 10.

Says Browne: “Having scraped knees can be an education.”

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