Ishares ETFs look Flash Crashy

[audreyh1]

Very curious that the manager would use a stop-loss order given that flash-crashes have been known for some time to be a risk.

Exactly! The 2010 flash crash was enough to tell me to NEVER put in a stop loss order. Not that I'd ever used one before, but I was never confident they would work as desired.

 

[samclem]

When comparing traditional index MFs with ETFs for my own use, these rare but present price "excursions" with ETFs are one source for concern. It's not a dealbreaker, but it's not comforting to know that for 10-30 minutes my account balances would have declined by a large percent, much larger than the volatility of the underlying equities. It has always resolved itself before I even noticed (so far), but if this can occur maybe the market/"system" will surprise us in a different and more scary way at some point--or at least the exchanges might need to stop trading for awhile and untangle the mess. With a "traditional" MF, the end-of-day pricing is a direct reflection of the NAV of the equities inside. To me, the fact that they can't trade rapidly and aren't used by HFTs,/arbitrageurs is a feature, not a bug.

 

[audreyh1]

It bothers me very much that some of the larger, more liquid ETFs were showing price declines of 40% while their underlying stocks were down only 10%.

If an ETF grossly deviates from the underlying basket of stocks, something is wrong with how they work. Clearly there are issues in volatile markets. Some people were apparently able to buy at those extreme discounts and keep the trade, while other people may have foolishly sold through stop losses or whatever.

You can buy CEFs if you want that extreme discount/premium "feature".

 

[utrecht]

I own some VDC (Vanguard Consumer Discretionary EFT). That morning when I looked at my account, it showed to be down 30%. I watched like a deer in headlights not knowing what was going on. Had I been smarter than I am, I wouldve put in a huge buy order.
I did buy AAPL just about at the low though and sold for 13% profit a short time later though.

 

[FUEGO]

Very curious that the manager would use a stop-loss order given that flash-crashes have been known for some time to be a risk.

Yeah, well, some money managers think they are smarter than the market (and continue to be proven wrong repeatedly). I like being on the other side of that trade.

 

[Running_Man]

It bothers me very much that some of the larger, more liquid ETFs were showing price declines of 40% while their underlying stocks were down only 10%.

If an ETF grossly deviates from the underlying basket of stocks, something is wrong with how they work. Clearly there are issues in volatile markets. Some people were apparently able to buy at those extreme discounts and keep the trade, while other people may have foolishly sold through stop losses or whatever.

You can buy CEFs if you want that extreme discount/premium "feature".

I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.

 

[audreyh1]

I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.

Definitely. The liquidity isn't there when it counts. Not good.

 

[NW-Bound]

Some time in the pre-2000 era, before the age of the ETFs, I invested in and read prospectuses of a few HOLDRs (Holding Company Depository Receipts), the daddies of the ETFs. In there, the composition of a HOLDR is defined. For example a round lot of 100 shares of PPH (Pharmaceutical HOLDR) would consist of x number of shares of PFE, y number of shares of JNJ, etc...

To ensure that the HOLDR would trade at the exact NAV of the components, any owner of the HOLDR can request that his shares be broken down into the individual companies and the shares sent to him. And conversely, anybody can assemble the exact composition of shares, sent them to the managing trustee, and request the exchange for the equivalent HOLDR share.

The above two-way exchange ensured that no premium nor discount can exist with HOLDRs, because someone would arbitrage that out. Because the HOLDRs' compositions are exact number of shares of constituent companies, HOLDRs are only traded in round lots of 100s; one cannot trade fractional shares of constituent companies.

Owners of HOLDRs shares were considered owners of the underlying companies, and could vote their equivalent shares. That is not true with MFs or ETFs, whose trustees get all the voting rights.

There are a few other differences between HOLDRs and ETFs. I admit that I have not read any ETF prospectus in details like I used to read about HOLDRs.

 

[NW-Bound]

All the HOLDRs of yesteryear are gone. They were either dissolved, broken down to the shares of individual companies and sent to share holders, or converted into ETF form.

Some of the trading symbols like PPH (Pharmaceutical), SMH (Semiconductor), OIH (Oil Services) still exist, but are that of the new ETFs, not the old HOLDRs.

 

[bingybear]

Definitely. The liquidity isn't there when it counts. Not good.

I'm not sure what the underlying value of stock was in my ETFs were, but would like to think that they were not all that low. But I've heard people report how low they bought some big names.
The second no buyers are present or there are only significantly discounted offers, the price is can not be determined or it is at the discounted price.
We will likely have more days to test the liquidity theory coming up in the near future.
So I'm not sure if the mechanism for ETFs worked... or failed. Price is based on underlying intrinsic value and prospects for the future. The latter is a matter of opinion and a scared set of people can drop the value instantaneously.
It may just be liquidity issues for Monday morning. But I don't know how fast they can react as they are 3rd parties. This is not the ETF company itself?

 

[jim584672]

I don't think the ETF structure is at fault. The problem with Monday was some stocks did not open, and those that did were priced at huge discounts. In order to arbitrage the ETF to the underlying stocks the whole basket needs to be trading. Computers can do arbitrage in a split second keeping the ETF and underlying in line. Creation units, large blocks of ETF stock, are added/removed from the ETF by the arbs.

 

[audreyh1]

I don't think the ETF structure is at fault. The problem with Monday was some stocks did not open, and those that did were priced at huge discounts. In order to arbitrage the ETF to the underlying stocks the whole basket needs to be trading. Computers can do arbitrage in a split second keeping the ETF and underlying in line. Creation units, large blocks of ETF stock, are added/removed from the ETF by the arbs.

Well, if some stocks weren't open, yet the ETF still traded, that is a problem!

 

[jim584672]

The SPY ETF trades before and after the market is open all the time, so not unusual.

 

[bjorn2bwild]

In this article Dave Nadig does a step by step analysis of the flash crash through RSP ( Guggenheim Equal Weight S&P 500 ETF). He has criticisms but argues that the market acted as it should have under the present set of rules.

Understanding ETF "Flash Crashes" — FactSet Research Systems

 

[FUEGO]

Well, if some stocks weren't open, yet the ETF still traded, that is a problem!

Not really. Huge ETFs trade all the time even though the great majority of the holdings aren't actively trading at the same time. VWO, for example. The Emerging Markets mutual fund undoubtedly holds a few equities that trade with ADRs in the US but most of VWO's holdings trade only on foreign markets and therefore might have stale prices during the US trading day when ETFs are trading. They mention all this in the prospectus I recall and they even talk about different classes of holdings within the ETF that have different levels of liquidity and pricing information.

 

[FUEGO]

I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.

Definitely. The liquidity isn't there when it counts. Not good.

I think you have legitimate concerns for some highly active ETF investors.

But is it really a big deal for us average investors? 8000+ hours of regular market trading has passed us by since the 2010 Flash Crash and then we experience 30 minutes of insanity for a limited segment of the entire ETF universe. That's 99.994% reliability.

And the issues were really only there for the sell side of the trade. Those of us on the buy side are pretty happy about things.