The $200bn Market Running on 2-Hour Production Windows

Why ETF Spreads Widen at the ASX Open, the 2-hour PCF Problem Explained

If you’re an Australian ETF issuer, your mornings aren’t all yoga, oat lattes and smashed avo on sourdough. You’re likely sweating bullets on the U.S. market’s close, and praying the unique diversity of issues that beset the Australian Portfolio Composition File (PCF) endeavour, don’t impact you when delivering your baskets prior to the ASX’s open: the timing is operationally brutal and makes Australian issuers do weird things to our beautiful  ETFs, just to keep the rubber on the road. 

I don’t want to sound all whiny; I knew the job was tricky when I took it, but the Australian financial services market has long had the vague odour of a herd endeavour. I’ve been selling into this market for 25+ years, and it has occasionally felt like there’s no riskier enterprise to the buy-side than genuine innovation. Smiley face emoji? 

It’s not universal, but en-masse, we seem to have developed a unique instinct to ‘jog off’ operational weaknesses rather than to look deeply and directly at whether there’s a better way. Developed world funds look like basis point junkies by contrast, scratching in the darker recesses of their operations to ferret out inefficiency. I remain convinced we’ll work it out, though. Like many things, it usually comes down to awareness.

Spreads

The Aussie morning PCF crunch is made even more striking when you consider that the best job you can do every day is not mess it up. 

Uncertainty about the timeliness, precision and accuracy of data used in a modern fund manager drives risk. And risk needs appropriate amelioration. In the PCF world, data risk drives spreads apart. Even a 5-10bps spread widening at the open of trading can translate into millions in annual investor cost drag.

The Issuer’s Time Zone Crunch

For a confirmed sun worshipper, it’s crazy that anything can be worse in Summer, but the PCF Crunch gets much worse when our clocks switch over on the first Sunday in October.

• U.S. Market Close: 4:00 PM New York = 6:00–8:00 AM Sydney (depending on daylight savings)
• ASX Market Open: 10:00 AM Sydney

That means in our wonderfully long and indulgent summertime-zone, Aussie ETF issuers get as little as 2 hours (even the 4 hours in winter is far from great) to perform the following operational gymnastics: 

• Capture U.S. closing prices and FX rates
• Build, validate, and sign off the PCF
• Package and distribute it to Authorised Participants (APs)
• Hope the APs can actually do something with it all before the bell rings open

Compare this with London: issuers get to push all the z’s they need overnight before handing their APs a fresh PCF every morning. Luxury!

Tightest Case (2-Hour Window)

• 8:00 AM: U.S. markets close, pricing feeds start
• 8:30–9:00 AM: ETF issuer scrambles to build and validate PCF
• 9:00 AM: PCF sent to APs
• 10:00 AM: ASX opens – ready or not

The AP’s One-Hour Dash

Once APs get the PCFs, hopefully – that dreadful manner adverb – around 9:00 AM Sydney time and then it’s their time in the barrel:

• 9:00–9:10 AM: Validate the basket
• 9:10–9:25 AM: Run hedges (FX, futures)
• 9:25–9:40 AM: Calibrate quotes for the ASX open
• 9:40–9:50 AM: Compliance and checks
• 9:50–10:00 AM: Final system readiness and a quick prayer

We were interested to know where the bottlenecks are. The biggest stress points are typically:

• FX feed timeliness (USD/AUD particularly)
• Corporate action reconciliation
• File delivery delays (anything after ~9:15 compresses the timeline too far)

This is a Robot’s Economy

We’ve worked with managers whose working days go on-hold every trading day whilst they eyeball their morning PCFs for quality, accuracy and precision. And by eyeball, I mean drive the below the line expenses by relying on a fund’s most valuable employees, fund managers and senior analysts, running manual processes that should really be a robot’s job – again, this is likely a matter of awareness. 

Operationally, there’s a lot to cram into that golden hour, especially if PCFs come in late or dirty. The UK gets a dignified morning production line, but in Australia, it’s more like a formula-1 pit stop. There’s clearly no shortage of competition in the Aussie ETF space. ETF investing is reported by the ASX to have surged in 2024, to reach $200 billion in FUM. This is a 20-fold increase in market size over 10 years*. This type of growth will always drive increased competition and sophistication – read complexity – in any financial products. 

It’s a textbook case study on how to capture an increasing share of already vast and growing market. I don’t think the answer to the question of how better to compete in a market with complex operational hurdles and tight timelines is more in-house, human, and systematic capital. Particularly when the rest of the globe and the competition have provided a detailed blueprint for success and are both headed in the opposite direction.

Why High-Quality PCFs Matter

Here’s where it gets real for investors: 

• Liquidity at Open: If PCFs arrive late, APs have less time to calibrate. That usually means wider spreads at the ASX open. Wider spreads = higher trading costs for investors.
• Operational Risk: Corporate actions, FX hiccups, or data breaks can derail the morning. When that happens in a 2-hour window, there’s no time for neat fixes – only triage.
• Knock-On Effects: If APs can’t price confidently, they’ll quote cautiously. That means orders may be filled at less favourable prices, or APs might even step back until they’re comfortable. None of these outcomes are good for liquidity.
• Global Comparison: Australia is an outlier. Issuers in the U.S., Europe, and even Asia enjoy bigger time buffers. That time buffer means fewer rushed jobs, fewer fat-finger mistakes, and smoother markets.

Voices From The Field

One of the most oft-quoted push backs to outsourcing is “We take <insert highly mission-critical process with terrible negative impacts for botching> very seriously – that’s why we do it (PCFs) in-house.”

It sounds like a noble and logical reaction… but it’s the opposite of the value that an enforceable contract with a high-quality, outsourced provider brings. Shutting down easily provable advantages is counter intuitive. The Australian buy-side outsources many critical processes: fund admin, custody, and data feeds. But when it comes to PCFs we currently appear happier to suffer operational pain and inefficiency than to take some short-term pain and innovate. If something in-house breaks, there’s really no useable route to accountability – do we yell at the team, sack the peeps we spent all that money training for messing up a robot’s job?! It’s a bit like bragging about being your own proctologist, it can be done, but should it be done?

Bundling Services 

Bundling what can look like ancillary services (PCFs) within bigger outsourcing contracts is common locally. While overseas markets lean on specialist providers with 24/5 or even 24/6 operational support coverage, local Issuers too often roll the dice by outsourcing much of their processes, only to keep the PCF process internal or leave with an under-achieving service provider. 

“I had problems with a service provider 5 years ago. I am assuming that all service providers are the same – bad – and that the global quest for innovation and improvement has magically passed by the ETF industry... despite the industry’s incredible growth.” 

It must be lack of awareness, right?

I’m working with the vendor to improve the service.

On the flip side, Australian ETF issuers do outsource PCFs with large, U.S.- and EU-based service providers. The catch? Do these giants ever really hear the voices of the Australian market when it comes to service efficacy, improvements, and customer support? And when they do hear, is it plausible for them to build complex, customised processes around a relatively small number of comparatively low-fee clients? 

Small Fish Big Pond

In practice, Aussie ETF Issuers are diminutive fish in an incredibly big pond, when it comes to service and product tailoring. Pressure to customise processes for clients of this scale are tricky to bring to production when your most profitable clients. In many cases, it’s simply not worth their while. Issuers are then forced to live with platforms and processes designed for the priorities of US, UK, and European Issuers. We have regularly heard from Issuers pressuring offshore behemoths to improve their services, whether data quality or simple file structures are the core problems; with little to no change being offered. I feel for the people working in these firms. I’m lucky to work with such a dynamic company that genuinely has the capacity to offer a highly customisable service. 

Folksy Analogy Inbound

If I can offer a personal analogy: I’ve just spent three years making weekly trips to the chiropractor just to stay upright, chronically asking my body to accommodate a back injury and treating it conservatively rather than thoroughly investigating what’s wrong, and how experts might fix it for good! What I really needed, and eventually had in June this year, was the invasive intervention of neck surgery, though I could have gone on for a few years without the knife: tiptoeing around the uncomfortable truth that what I really needed was radical surgery. Was there cost? Yup! Was it crazy expensive? Nope! Was there pain? Some! Did the pain stop being a problem after surgery? YUP! 

Australian ETF issuers are essentially in the same state. They don’t need crackin’ and chattin;’ they need more expert assistance. They need surgery!

What to do?

I work in business development, so the realisation that this piece is framed from the work that I do at Ultumus shouldn’t be controversial. Furthermore, Ultumus is currently the world’s largest agnostic PCF calculation agent, and as such deserves a seat at the table. 
Having said that then, my first recommended course of action is to get in touch with us at Ultumus to chat about the efficacy of your current PCF service provider, especially if that’s you! There’s never any obligation to get a demo and have a chat and we’re clearly one way of solving the problem.

Additionally, try this checklist:

• Assess your current process (internal vs outsourced) – obviously at the enterprise level and ideally with championship from the CEO to begin with.
• Benchmark against global best practice – although keep in mind that they’re likely not as anxious about file production timing.
• Engage with providers (Ultumus, others) – I bang on about this a lot, but chat with sales and relationship management from firms you don’t yet use, they have a lot of information stored as war stories.
• Work with APs on spread/timing planning – talk to your clients specifically and formally about this issue.

Conclusion

Next time you see an ETF trading smoothly on the ASX at 10:01 AM, spare a thought for the Issuer’s operations team. Just like they do 5 days each week, they’ve just pulled off a high-wire act that would terrify their London and New York peers.

Isn’t it time we recognised the unique pressure of “The Great Aussie Morning Crunch” and helped Australian ETFs live up to their promise of efficiency? After all, it’s not just about the timing; it’s about keeping spreads tight, liquidity flowing, and investors happy.

* Trends in the ETF market, Monique Bell, Product Manager – ASX, Mon 14 October 2024.