In this episode, we are joined by Morley Conn, Director of Sales and Strategy, ETF Services at Scotia Global Banking and Markets, for a deep dive into the mechanics of the ETF ecosystem. With more than 30 years of experience across equities, foreign exchange, and money markets, Morley pulls back the curtain on the creation and redemption process, ETF liquidity, block trading, market making, and the often-overlooked infrastructure that allows ETFs to trade efficiently every day.

We explore how authorized participants and market makers facilitate liquidity, why ETF liquidity is driven by the underlying holdings rather than trading volume, and how large institutional ETF trades are executed. Morley also explains the differences between Canadian and U.S. ETF markets, discusses common misconceptions investors have about ETF trading, and shares practical advice for retail investors seeking better execution. This conversation offers a rare look at the operational machinery behind one of the most important innovations in modern investing.

Key Points From This Episode:

(0:04) Introduction to Morley Conn and his role in ETF market making.

(4:29) The key participants in the ETF ecosystem: issuers, custodians, market makers, advisors, and dealers.

(5:53) What market makers and authorized participants actually do.

(7:03) How ETF creation and redemption works and why it matters for liquidity.

(10:58) How ETF portfolio management differs from traditional mutual fund management.

(12:44) Why ETF trading volume often greatly exceeds primary-market creations and redemptions.

(13:35) The capital gains refund mechanism and its relationship to ETF trading activity.

(16:04) What happens when ETF market prices diverge from net asset value (NAV).

(18:24) Lessons from the March 2020 bond ETF dislocations and what they revealed about market pricing.

(19:16) How market makers price ETFs when underlying securities are illiquid or difficult to value.

(20:38) Managing ETF market-making risk when underlying markets are closed.

(21:35) The major factors that influence ETF bid-ask spreads.

(23:26) Why market makers prioritize trading volume and investor experience over wide spreads.

(26:45) How large ETF block trades are executed and hedged behind the scenes.

(29:26) Why ETF liquidity is determined by the underlying holdings rather than visible trading volume.

(30:43) The difference between NAV trades and at-risk trades.

(32:46) How market makers contribute to the development of new ETF products.

(34:20) Best practices for retail investors when trading ETFs.

(37:34) Factors that determine when block trades make sense.

(38:46) Why pricing ETF blocks is both an art and a science.

(43:14) What happens when an ETF is shut down and how investors are affected.

(46:22) The balance between retail and institutional participation in the Canadian ETF market.

(48:27) How institutions and retail investors use ETFs differently.

(51:23) Key differences between Canadian and U.S. ETF markets.

(54:56) ETF tax efficiency in Canada versus the United States.

(56:23) Common misconceptions investors have about ETF liquidity and assets under management.

(1:00:13) How CRM3 total cost reporting could influence ETF adoption in Canada.

Links From Today's Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on YouTube — https://www.youtube.com/channel/ Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)