Bank of America Merrill Lynch has launched an exchange-traded fund algorithm, ETF-aX.

This new ETF-specific algorithm analyses market depth and price data across an ETF's underlying portfolio to identify the most efficient combination of ETF, stock and futures, and then automatically trades them to source liquidity and find the best prices.

"The primary challenge with trading ETFs is market fragmentation; liquidity is limited outside of the top-ranked ETFs," says Charlie Whitlock, an execution consultant at BofA Merrill. "By using ETF-aX, clients are able to leverage our in-house ability to trade a combination of the component parts in different markets, gaining liquidity at more efficient pricing."

Upon receiving a client's order to trade an ETF, the engine analyses inside pricing and depth of book across the ETF, stock, and futures markets to compile a picture of available liquidity.

Once ETF-aX determines the optimal way to transact, balancing a desire for the best pricing against a need to capture the most liquidity, slices are simultaneously sent out to all market centres. A composite ETF price is assembled from the different executions and provided to clients.