With the markets back from an extended and waterlogged vacation, all eyes-including ours-were on ETF trading activity today. And for the most part, it was a yawner.
Volatility and volume were nothing extraordinary. There weren't a bunch of horribly broken trades on the open, or anything like that.
And then, Knight Capital had a hiccup, and oh how the market likes to poke at Knight.
When Knight reported that it had to shut down trading due to backup power failure, I got a dozen frantic phone calls asking if this was going to blow up trading in ETFs for which Knight is the lead market maker (LMM). The answer, it appears, is pretty much the same as it was last time:It depends.
So first, the ground rules:All we looked at were ETFs that traded over 1,000 shares today. So the truly abandoned ETFs and ETNs didn't influence this list. If it didn't trade, it didn't count.
Let's start with the most naive way of the day's trading:average spreads. Here's the chart, and then I'll tell you why it's bad:
Wolverine still doesn't look great here-after all, with only a handful of funds, there's nowhere to hide-but have fun trying to pick Knight out of the sub-25 basis point spreads at the bottom of the chart.
So what creates this enormous difference between average and median? Outliers.
Knight is, quite literally, the only market participant on The Street paying attention to some of the smallest, most illiquid ETFs on the planet. When Knight's in the market for these folks-their clients-they keep spreads rational and tight.
When someone has to break for the proverbial sandwich, there's nobody in the market to step in and take their place. Here's an example of what happened to the five most illiquid ETF-as measured by spreads-in the Knight portfolio today:
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