![]() “It was liquidity drying up in the underlying fixed income markets.” “This wasn’t an ETF liquidity story,” says Matt Berger, head of bond trading at Jane Street. These “ authorised participants” - like Jane Street - are the under-appreciated cogs of the industry’s machinery. When there is a demand imbalance, specialised market-makers that have the right to create or redeem ETF shares step in. Their shares trade like stocks on an exchange, but shares are also separately constantly created or redeemed to handle inflows and outflows and ensure that they track their index. These issues go to the heart of how ETFs function. Some critics even say the US central bank’s decision to start buying corporate bonds for the first time - including through ETF purchases - was akin to a bailout for the industry. Some analysts warned of a potential “ liquidity doom loop”, arguing that massive ETF selling was hammering the underlying bond market, which could have culminated in market meltdowns had not the Fed intervened so aggressively. Myriad signs of financial distress were visible when the global economy went into lockdown last March, but one of the most alarming were huge differences that opened up between the tumbling price of many bond ETFs and the value of the securities they held. The company’s forte is lubricating trading in exchange traded funds and other markets “I still walk in every day thinking that we’re still struggling to survive,” he admits. ![]() Nonetheless, Mr Granieri insists there is little triumphalism at Jane Street. “We think of ourselves as mainly built for crises,” says Rob Granieri, one of the company’s founders. You could see the results when markets took a deep dive in March of last year.” “They provide liquidity by both buying and selling, which is crucially important. “They provide an essential service to the marketplace,” Mr Schwab says. In fact, investor interest has been whetted by how fixed income ETFs kept trading even as corners of the bond market gummed up, with inflows hitting a record in 2020.Įven Charles Schwab, the founder of his eponymous brokerage and once a sceptic of the new breed of higher-speed, modern market-makers like Jane Street, has grown more appreciative of the role they play. Nonetheless, a smattering of studies in the wake of the tumult have guardedly concluded that bond ETFs proved resilient and may even have helped investors manage the coronavirus shock. Some sceptics argue that only the Federal Reserve’s extraordinary stimulus prevented a disaster for fixed income ETFs, and remain convinced that they could still prove fragile. That extra confidence paid off handsomely when markets were thrown into a tailspin last March, and bond ETFs emerged as a major faultline. “Because we bought all that extra protection we didn’t have to worry about the extreme moves, and were prepared to provide liquidity in an outsized way.” “Our basic service, standing ready to buy and sell ETFs, options and bonds, is even more critical in times of stress,” says Josh Kulkin, one of its top traders. In early February, the firm aggressively ramped this up to ensure it could still confidently keep trading even if turmoil hits the markets. Even beyond every trading desk’s routine hedging of positions, Jane Street at a company level spends $50m-$75m a year on put options - derivatives that pay out if markets slump. The present method makes it possible to obtain quick and easy estimate of the effect on the surface free energy of different potential-truncation schemes used in computer simulations.Culturally, Jane Street has also always been a little paranoid, with executives constantly fretting about the risks of improbable but catastrophic crashes. In contrast, if we apply the same procedure to estimate the variation of the liquid–vapor surface tension, for different variants of the Lennard-Jones potential (truncated/shifted/force-shifted), we find that the agreement with the available simulation data is, at best, fair. We find that the agreement between theory and simulation is excellent. As an illustration we estimate the liquid–solid interfacial free energy of a Lennard-Jones system with truncated and shifted interactions and compare the results with numerical data that have been reported in the literature. Although this approximation does not yield particularly accurate estimates for the liquid–vapor surface tension, we find that it works surprisingly well for the interface between a dense liquid and a solid. ![]() The most naive perturbation method to estimate interfacial free energies is based on the assumption that the interface between coexisting phases is infinitely sharp.
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