News > Asset Management

Friendly fire helped to blow up ETFs on Black Monday

By NexChange
Asset Management

ETFs traded like drunken sailors on Black Monday, practically throwing themselves overboard.

Recall on August 24, some ETFs traded at a 50% discount to the underlying baskets of stocks that they reference.

Is that anyway for a $2 trillion-plus market to act, even if the Dow Jones Industrials tumbles 10% at the open?

No. It is not. Credit Suisse estimates that 42 cents of every dollar traded on U.S. exchanges is for an ETF.  A lot of industry insiders have said some self-serving stuff. Or retail investors shouldn't set market orders. Thanks for the advice.

Barron's takes a deep dive into what happend on August 24 and comes up with some pretty interesting observations. Observation numero uno: New regulations put in place after the June 2010 flash crash made things much worse. Namely: 327 ETFs were forced to halt trading for five minutes; some were halted more than 10 times.

What would you do if suddenly you had no idea how much the ETFs you were trading were worth? Or more important, what would a market maker do? Widen the hell out of the spread. And then you get iShares Core S&P 500 tumbling 26%, more than 20 percentage points below the underlying stocks for the $65 billion ETF. This is the stuff of panic.
“Aug. 24 highlighted the fragility of ETFs in a stressed market,” says James Angel, a professor at Georgetown University who specializes in the functioning of the stock market. “The characteristics of the products aren’t going to change, so we need to contain that fragility.”
Later this month, the SEC's equity market structure committee is holding a meeting. Let's hope ETF structure is top of the agenda.

Read the entire analysis at Barron's here. It's very good stuff.
Photo: Official U.S. Navy Page

Subscribe to our Newsletter

Be one of the first to experience the future of financial services