The Hidden Liquidity of ETFs: Looking Beyond What’s on the Screen

When traders evaluate an ETF, one of the first things they look at is average daily volume, displayed size, and bid-ask spread. But what if those metrics only tell part of the story?

Visible vs. Inaccessible Liquidity

One of the most unique aspects of ETFs is that their liquidity often extends far beyond what is visible on an exchange. Unlike stocks, ETFs are not limited solely by the shares changing hands in the secondary market. Through the creation and redemption process, ETFs can tap into the liquidity of their underlying holdings, allowing additional liquidity to be sourced when needed. This is where the idea of inaccessible liquidity comes into play.

Two Layers of ETF Liquidity

While the liquidity exists, it isn’t always displayed on a screen. Market makers and authorized participants can access the underlying basket of securities, hedge risk, and create or redeem ETF shares as needed. As a result, an ETF that appears thinly traded may actually be capable of supporting significantly larger trades than its exchange volume suggests. In fact, ETF liquidity operates on two levels: the liquidity of the ETF itself, reflected in normal exchange trading activity, and the liquidity of the underlying securities that make up the fund. Together, these create a much deeper liquidity pool than many investors realize.

Why ETF Liquidity Differs from Equity Liquidity

This dynamic is one of the reasons ETF trading often differs from traditional equity trading. Most equity workflows were built around stocks, where supply and demand are driven by a fixed number of shares. ETFs, however, have an additional mechanism that allows liquidity to be generated and accessed in ways that traditional stocks cannot. Historically, accessing this deeper layer of liquidity often required traders to engage directly with ETF market makers through RFQ workflows. These workflows have long been effective for larger trades because they allow liquidity providers to evaluate a specific order, price the associated risk, and hedge using the underlying securities rather than relying solely on displayed exchange liquidity.

From Manual RFQ to Electronic Access

The challenge was that these workflows were often manual and reserved for larger institutional orders. As the ETF market has matured, the focus has shifted toward making this liquidity more accessible within electronic trading workflows. The goal is straightforward: connect traders to a broader pool of ETF liquidity without forcing them to leave their existing execution process.

Bringing Inaccessible Liquidity into the Workflow

At QwickRoute, rather than requiring traders to step outside their existing execution workflow to source additional liquidity, aRFQ™ helps bring the benefits of the RFQ process directly into electronic trading. By connecting traders with ETF liquidity providers more efficiently, it helps make previously inaccessible liquidity more accessible across a wider range of order sizes. Exchange volume and displayed quotes are important, but they are not the complete picture. Sometimes the most valuable liquidity in the market is the liquidity you can’t see.

Illustrative aRFQ Executions

The following table highlights examples of trades executed through aRFQ at or better than the NBBO for sizes far exceeding the lit market at the time: