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Look at the ETF RSP yesterday. It's pretty much an S&P 500 index fund. When the S&P was down about 5% in the morning, RSP was down up to 40%. Didn't make any

Look at the ETF RSP yesterday. It's pretty much an S&P 500 index fund. When the S&P was down about 5% in the morning, RSP was down up to 40%. Didn't make any sense. Trading was getting halted every few minutes and buy orders were going unfilled. http://finance.yahoo.com/echarts?s=RSP+Interactive#{%22range%22:%221d%22,%22allowChartStacking%22:true} http://finance.yahoo.com/echarts?s=RSP+Interactive#{%22range...

lrm242 11y ago
It makes a ton of sense, actually. Intense fear drove large demands for liquidity thus spiking volatility. Thinly traded stocks and ETFs were hit harder than thick ones. ETFs, in particular, had additional demands placed on them as their underlyings were thrashed about at the open as many rushed to sell. The halts were from both limit up/down price band violations and volatility pauses and they did exactly what they were designed to do. In short: liquidity costs money and it isn't an infinite resource.
jackgavigan 11y ago
An ETF like RSP won't always track the underlying index value exactly, especially in fast-moving markets. Units of an ETF are just like any other share - an imbalance of sellers over buyers will drive the price down. In an orderly market, that usually isn't a problem - market makers will typically be there ready to absorb market orders and smooth out temporary imbalances, and "authorised participants" can create/redeem units/shares in the ETF if the market price starts to deviate from the NAV (net asset value - the market value of the underlying assets in the fund). In a situation like we had yesterday morning, it's likely that market makers and authorised participants were staying out the market because it was moving too fast for them. In that sort of situation, if panic-sellers or forced sellers (e.g. due to margin calls) are placing market orders, an order book imbalance could easily develop, temporarily driving the price down to an unreasonable level before the market stabilises. Sudden drops trigger trading halts, where trading is suspended for ~5 minutes. Trading in RSP was halted ten times between 9:30 and 10:30am yesterday - it didn't actually trade continuously for more than 34 seconds during that time (you can see this on the chart you linked to - there are only 11 points in the big V on the chart, then it reverts back to one point every minute from 10:30 onwards. The same sort of thing happened during the Flash Crash in 2010.
marincounty 11y ago
Yea, it's the speed of the drops. I saw more than a few weird looks from veteran stock analysts yesterday. The analysts who were older than 50 seemed to be the most honestly shocked, but tried to keep their composure. The look was like, 'I'd like to blame this on ETF's, but something else is going on?'

lrm242 11y ago

It makes a ton of sense, actually. Intense fear drove large demands for liquidity thus spiking volatility. Thinly traded stocks and ETFs were hit harder than thick ones. ETFs, in particular, had additional demands placed on them as their underlyings were thrashed about at the open as many rushed to sell. The halts were from both limit up/down price band violations and volatility pauses and they did exactly what they were designed to do. In short: liquidity costs money and it isn't an infinite resource.

jackgavigan 11y ago

An ETF like RSP won't always track the underlying index value exactly, especially in fast-moving markets. Units of an ETF are just like any other share - an imbalance of sellers over buyers will drive the price down. In an orderly market, that usually isn't a problem - market makers will typically be there ready to absorb market orders and smooth out temporary imbalances, and "authorised participants" can create/redeem units/shares in the ETF if the market price starts to deviate from the NAV (net asset value - the market value of the underlying assets in the fund). In a situation like we had yesterday morning, it's likely that market makers and authorised participants were staying out the market because it was moving too fast for them. In that sort of situation, if panic-sellers or forced sellers (e.g. due to margin calls) are placing market orders, an order book imbalance could easily develop, temporarily driving the price down to an unreasonable level before the market stabilises. Sudden drops trigger trading halts, where trading is suspended for ~5 minutes. Trading in RSP was halted ten times between 9:30 and 10:30am yesterday - it didn't actually trade continuously for more than 34 seconds during that time (you can see this on the chart you linked to - there are only 11 points in the big V on the chart, then it reverts back to one point every minute from 10:30 onwards. The same sort of thing happened during the Flash Crash in 2010.

marincounty 11y ago

Yea, it's the speed of the drops. I saw more than a few weird looks from veteran stock analysts yesterday. The analysts who were older than 50 seemed to be the most honestly shocked, but tried to keep their composure. The look was like, 'I'd like to blame this on ETF's, but something else is going on?'