ETF Sales & Trading Toronto | Montreal | Exchange Traded Funds Structure and Market Making September 2014

National Bank Financial Markets | Strictly Private & Confidential 1 Mutual Fund vs. ETF Structure BuyersFund Underlying Assets Sellers Market Makers ETF Underlying Assets Buyers Stock Exchange Sellers Mutual Fund Market StructureETF Market Structure

National Bank Financial Markets | Strictly Private & Confidential 2 ETF Market Making Process Stock Exchange Market Makers ETF Underlying Assets Buyers Financial Intermediaries Sellers Financial Intermediaries 1 st Level of Liquidity Primary Market Cash or Securities In-Kind Exchanged for ETF units The creation and redemption process distinguishes ETFs from mutual funds and closed-end funds ETFs track fair value due to market makers’ arbitrage potential and ability to subscribe/redeem Three levels of liquidity: (1) Natural buyers and sellers, (2) Market Makers and High & Frequency Traders (3) Primary Market subscriptions and redemptions 2 nd Level of Liquidity 3 rd Level of Liquidity Secondary Market

National Bank Financial Markets | Strictly Private & Confidential 3 ETF Arbitrage Arbitrage: The simultaneous buying and selling of an asset, or similar financial instruments, in different markets or forms in take advantage of price differences and obtain riskless profit. For example, if the market value of the underlying basket of stocks (on the offer side) is lower than the offer of the ETF, market makers would simultaneously buy the stocks and sell the ETF, and subsequently subscribe for the ETF by delivering the basket of stocks. Basket of Stocks - RY 8.0% - TD 7.4% - BNS 6.3% - SU 4.9% - etc…. Market Maker ETF Buy Stocks at 9.50 Sell ETF at 9.51 BID 9.49 OFFER 9.50 BID 9.48 OFFER 9.51 Market maker has locked in 1 cent per share in riskless profit

National Bank Financial Markets | Strictly Private & Confidential 4 ETF Arbitrage continued… Once the market maker has locked in riskless profit (i.e. 1 cent per ETF unit traded) the market maker can subscribe for newly issued ETF units by: Delivering the underlying basket of stocks that was purchased In exchange, taking delivery of ETF units to cover its short position Basket of Stocks - RY 8.0% - TD 7.4% - BNS 6.3% - SU 4.9% - etc…. Market Maker ETF Buy Stocks at 9.50 Sell ETF at 9.51 ETF Company Deliver underlying Basket of Stocks Receive ETF units in exchange for Basket of Stocks

National Bank Financial Markets | Strictly Private & Confidential 5 Automated Quoting Process Market Information Stock Data - TSX - NYSE - NASDAQ Bond Data - Pricing Source - Internal Futures Data - Equity - Bond - Commodity FX Data Market Maker Electronic trading programs TSX Market Makers quote 100s of ETFs daily Electronic Feeds ETF Electronic Quotes Fair value bid-offer is determined by underlying securities plus several other inputs Underlying can be baskets (index, sub-index, etc.), futures (Bullion, Nat Gas, etc.), ETFs, etc. Program’s goal is to minimize exposure, i.e. maintain a hedged position and make money Other inputs include: Ticketing Charges, Creation/Redemption Fees, Exchange Fees, Taxes, etc.

National Bank Financial Markets | Strictly Private & Confidential 6 ETF Liquidity More sellers than buyers More buyers than sellers For stocks, supply and demand drive stock price For ETFs, intraday supply and demand does not typically affect price; price is based on intraday fair value, which is based on the underlying index Stock Price More sellers than buyers More buyers than sellers ETF Price Close to Fair Value Supply Demand Supply Demand Single StocksETFs

National Bank Financial Markets | Strictly Private & Confidential 7 Presenter Greg Jones, Managing Director |

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