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 have backfired.
The carnage was bad for stocks, but even worse for ETFs and ETNs. Much is being made about the Accenture (ACN) 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 a dollar.
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 NASDAQ reads:
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 be cancelled
- 67 ETPs (0.7%) had trades from +15% to +60% which will not be cancelled
- 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 affiliates: 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 mentioned.