Tamping ETF Volatility

Suggestions to Safeguard Trading in the $2 Trillion ETF Industry

On most days, hundreds of millions of shares of exchange traded funds (ETFs) are traded with remarkable efficiency at a very low cost. The normally smooth functioning ETF market allows investors to easily get access to a wide range of investment portfolios at a very low cost. However, for about an hour on August 24th, 2015, circuit breakers interfered with regular ETF trading, and during that time some ETF’s traded at prices far from their fair value.

In an effort to help improve markets and ensure ETF prices do not get dislocated in the future, MMI wrote a letter to the U.S. Securities and Exchange Commission. In it, we suggested measures to protect investors and help professional intermediaries maintain orderly markets in Exchange Traded Funds (ETFs) during times of severe market volatility.

We proposed three practical solutions:

An optional “retail circuit breaker” that would protect investors from ETF prices that were a long way from their NAV.

Requiring exchanges to make clear when they would “break” a trade in an ETF.

Easing restrictions that would make it easier to hedge long ETF positions.

Further Resources:

July 30, 2016: Barron’s – How to Fix the ETF Industry
Chris Dieterich reports ETFs aren’t in crisis, but are in transition. Changes are needed so investors can trade safely. Modern Markets Initiative, a trade group for high-speed traders, suggested a mechanism it called the “retail circuit breaker,” which would automatically suspend a trade if it was about to be executed above or below some threshold, say 5%, of the value of the ETF’s assets.

September 24, 2015: MMI Letter to the SEC Proposing Improvements to ETF Trading
MMI sent a letter to the U.S. Securities and Exchange Commission proposing three meaningful changes to market structure that will have the effect of increasing liquidity in ETFs and protecting retail investors.

December 2015: Equity Market Volatility on August 24, 2015
A research note from the US Securities and Exchange Commission Staff of the Office of Analytics and Research Division of Trading and Markets. It is not intended to reach or suggest any legal conclusions or factual findings regarding the causes of the volatility on August 24 or potential steps to address volatility. Rather, it is a preliminary step to help inform a public assessment of the operation of U.S. equity markets under stressed conditions.

March 10, 2016: Top ETF issuers ask U.S. SEC to prevent repeat of Aug 2015 turmoil
Reuters news story reporting that a group of 18 top exchange-traded fund issuers, traders and other financial firms asked the U.S. Securities and Exchange Commission in a letter on Thursday for action to prevent a repeat of the irregular volatility seen last Aug. 24.

October 2015: U.S. Equity Market Structure: Lessons from August 24
Publication representing the regulatory and public policy views of BlackRock, cites MMI’s SEC letter when discussing remedies to market volatility.

September 25, 2015: Speed Traders Offer ETF Fix to Prevent Repeat of August Rout
Bloomberg News story discussing the solutions proposed by MMI in an effort to help improve markets and ensure ETF prices do not get dislocated in the future.

“High-frequency trading in general has been good for the retail investor."


Bloomberg News, April 24, 2014

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