How a Market Decline Affects ETF Trading: The Case of JNK

| About: SPDR Bloomberg (JNK)
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Thursday’s market sell-off resulted in a slew of anomalies. One of them was the sudden spike in trading volume seen across the board, for instance in SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK) as the Dow Jones Industrial Average was sinking close to 1,000 points.

For full disclosure, we own this fund for our clients, so we were eying it closely Thursday as the markets went into free-fall mode.

Check out the one-day chart of JNK below. The trading volume line is fairly flat until right around when the markets started crashing, when it suddenly spikes an amount that’s way out of the norm for this fund.

Intraday trading volume on JNK jumped to five times normal, which suggests that market orders put in place were suddenly executed, hitting JNK and dozens of other ETFs. The spread in JNK swelled to several percentage points; even the most liquid ETFs saw their spreads widen drastically as a result of the heightened activity seen in these funds, says Paul Weisbruch at StreetOne Financial.

What went wrong?

The sell-off yesterday led to many positions hitting their stop-loss points, and many of those stop-loss points had market orders on them. That triggered a slew of automatic selling, and trading volume spiked.

Market orders are orders to buy or sell at the current market price, as opposed to limit orders.

This illustrates the risk in market orders. Although placing a market order guarantees your order will go through, the price you pay may not ultimately be the price quoted. Throw in a highly volatile market and you stand to lose a lot of money.

It’s wise to use limit orders when buying or selling. This ensures that you never pay more than what you specify and transfers the control of the trade back into your hands.