Cantor Fitzgerald & Co., known for rising from the ashes of 9/11 by rebuilding its firm with a fistful of survivors and a vow to support the families of the hundreds of employees it lost in the World Trade Center attacks, last week announced new plans to become a principal trader in the global exchange-traded funds market space through its new ETF arbitrage group.
Using analysis drawn from proprietary pricing models and research, the group will analyze and compare in real time the market behavior of ETFs. Their counterviews will define their arbitrage plays. When they see an opportunity, the group will take positions such as e-mini futures on the SPDR S&P 500 ETF, based on the SPDR index on the Standard & Poor’s 500 index, and derivatives on the iShares Russell 2000 Index Fund (IWM) , the ETF on the Russell index. They will take similar positions for utility, commodity, currency and other ETFs.
Cantor selected Dan Segal to head the group under Jarred Kessler, the firm’s global head of equities. Segal, a former domestic ETF trader on the American Stock Exchange and founder of SEG Capital, has been making a market in ETFs since the late 1990s when he worked at Spear, Leeds & Kellogg, which Goldman Sachs Group acquired in 2000. Institutional Investor Contributor Maureen Nevin Duffy recently spoke with Segal and Kessler.
Institutional Investor: Why is Cantor entering this hotly competitive end of the ETF business, and why now?
Dan Segal: It’s a great time to be in this business. ETFs are growing by leaps and bounds. It’s one of the fastest-growing sectors. Why now? People have lived through ’08 and the credit crisis. It’s an uncertain world we live in.
Who’s on your team?
DS: My former partner at SEG and the Amex, Joseph La Grasta; Todd Alberico, a former ETF trader at Goldman Sachs, who will handle international and currency ETFs; and Kanellas Cafcules, who also was with me at the Amex and Goldman Sachs. Cafcules will lead fixed income and commodity ETFs.
What’s your target market?
Jarred Kessler: Largely, institutional clients. Every institutional client is playing ETFs. We have a great sales force in ETFs now — 140 domestic salespeople. If we’re not the largest domestically, I haven’t heard of anyone who is larger than us. And we’ll be leveraging existing relationships.
Which ETFs will you arb?
JK: We’re working through every issuer out there. If clients want exposure to the Japanese yen, utilities, alternative energy or gold, Dan’s group can supply the bids and offers offers at a larger size than our peers’. Liquidity is very important in this business. Our technology can provide the best bids and offers.
Where will the revenue streams come from?
DS: Commissions on customer business. Actual amounts are proprietary between the company and the client. Our goal is to provide the best liquidity on the Street and good content information — not advice. We’ll be putting out to clients periodic pieces on our interpretations of how to express certain views. Investors want diversity, to take specific theme views. ETFs are the way to do that.
How does ETF arbitrage fit with Cantor’s global business plans?
JK: We want to be a one-stop shop, to diversify and build out, to continue to expand our existing equities platform.
