ETFs Caught Up In The Weirdness

Nonetheless, Wednesday’s episode affected a few ETFs, such as Vanguard’s VPU--apparently because one of its constituents, Excelon Corp. (NYSE: EXC), was caught up in the unhinged trading. EXC shot up Wednesday morning, and, it seems, took VPU up with it. The ETF's NAV was around $81 a share, but a number of trades were above that price—some at more than $84.92 a share.

The Market Vectors Gold Miners ETF (NYSEArca: GDX) is another ETF that became untethered from its NAV during the episode, falling sharply during the episode.

Neither VPU nor GDX were on NYSE’s list of securities the exchange said it was reviewing, but EXC, the utility company, was.

So, while the unhinged algorithm at Knight doesn’t appear to have been explicitly linked to particular ETFs, Knight problems did bleed a bit into the world of ETFs. Knight, by the way, is the lead market maker on as many as 350 ETFs.

The Accident That Happened

On Wednesday, Knight saw its stock drop by a third as news spread about its wayward program-trading system. The episode was reportedly triggered by a human error that allowed for hundreds of trades to be executed in minutes instead of over a longer period.

“An initial review by Knight indicates that a technology issue occurred in the company’s market-making unit related to the routing of shares of approximately 150 stocks to the NYSE,” the company said in a prepared statement on Wednesday.

For its part, the New York Stock Exchange said separately in an electronic communique that it was reviewing trades on 148 stocks for possible cancellation under its “clearly erroneous” rules. It later ruled that trades on six of those stocks were canceled.

The stocks with canceled trades were the following:

• Wizzard Software Corp. (NYSE: WZE), on trades at or above $4.68 a share
• China Cord Blood Corp. (NYSE: CO), at or above $3.22
• Reaves Utility Income Fund (NYSE: UTG), at or below $0.0497
• E-House (China) Holdings Ltd. (ADR) (NYSE: EJ), at or below $3.36
• American Reprographics Co. (NYSE: ARC), at or above $5.71
• Quicksilver Resources Inc. (NYSE: KWK), at or above $5.91

Market sources, who spoke to IndexUniverse on condition of anonymity, said that human error appears to have set the automated trading on its wayward course. Specifically, the sources said that a series of trades meant to be executed over a period of at least several days instead got executed within minutes.

“Everything we’ve heard is speculation, but what we have heard is that there was some sort of human error,” a trader said on Wednesday. “It seems to be some sort of accelerated (trade),” the trader said.

Not The ‘Flash Crash’

The limited scope of the problem makes the episode, at first blush, quite different than the “flash crash” of May 6, 2010.

On that day, the entire Dow Jones industrial average plunged by 10 percent, or almost 1,000 points, only to retrace most of those losses within 30 minutes before closing 3 percent lower. A large trade by a mutual fund firm set off the selling, during which market makers fled the scene, exacerbating the swiftness of the sell-off.

After the flash crash, about two-thirds of the securities with erroneous trades that ended up being busted by regulators were ETFs.

About a third of all equity trading now involves exchange-traded funds and, moreover, ETFs are a huge part of the electronic trading infrastructure that is becoming more and more prominent in modern financial markets.

Still, some like Freeze worry that electronic trading may be blamed, and not the lack of proper oversight.

Previous Page

1  |  2

| Full Article  |Next Page