Market liquidity was tested on Thursday. It failed. The blame
game is now in full motion, with many analysts pointing to
an NYSE circuit-breaker mechanism that seems to
The carnage was bad for stocks, but even worse for ETFs and
ETNs. Much is being made about the Accenture (
) trade that
took place at a penny
. However, of the 971 ETFs and ETNs with trading activity on May 6,
twenty-two traded for a penny or less and 164 traded for less than
By my count, 167 ETFs and ETNs experienced intraday drawdowns in
excess of -90%. That translates to more than 17% of those that
traded. The NASDAQ and NYSE ARCA (the electronic trading arm of the
NYSE) said they would cancel many trades. The official notice from
We have coordinated a process among U.S. Exchanges and
therefore, pursuant to NASDAQ Rule 11890(b), NASDAQ, on its own
motion, will cancel all trades executed between 14:40:00 and
15:00:00 greater than or less than 60% away from the consolidated
last print in that security at 14:40:00 or immediately prior.
I do not have any easy way of determining all the ETF prices
immediately prior to the panic, so the following analysis is based
on moves from the prior day's closing prices.
- 183 ETPs (18.8%) had trades in excess of -60%
- 25 ETPs (2.6%) had trades in excess of +60%
- 208 ETPs (21.4%) are therefore subject to having some of
their trades cancelled
- 149 ETPs (15.3%) had trades from -15% to -60% which will not
- 67 ETPs (0.7%) had trades from +15% to +60% which will not be
- 216 ETPs (22.2%) with extreme trades from +/-15% to +/60% had
none of their trades cancelled
I think it is reasonable to assume that most of the ETPs that
traded more than 60% away from the prior close also had trades that
were in the 15% to 60% range. Based on that assumption:
Approximately 424 ETPs (43.7%) had extreme trades from
+/-15% to +/60% that will not be cancelled.
There were participants on each side of those trades. Some are
happy, some are not so happy.
Most markets were already down more than 5% from their recent
peaks prior to Thursday's action. Therefore, nearly every trailing
stop on long unleveraged equity ETFs was triggered. More
regulation: coming soon to a stock exchange near you.
Every month I harp on ETF liquidity concerns, while others say
there is nothing to worry about. Ask the owners of the 424 ETPs
mentioned above what they think.
Disclosure covering writer, editor, publisher, and
No positions in any of the securities mentioned. No positions in
any of the companies or ETF sponsors mentioned. No income, revenue,
or other compensation (either directly or indirectly) received
from, or on behalf of, any of the companies or ETF sponsors
Investing in Europe Without Exposure to the