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ETF Flash Crash of August 24 2015 and Insane Bid-Ask Spreads (Working Paper)

Research · October 2015

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Pankaj Agrrawal
University of Maine
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Tickers mentioned here:

ETFs are supposed to—and generally do—trade in lockstep with the stocks they own, with very little tracking error.
Yet when the S&P 500 fell as much as 5.3% in the opening minutes of trading, the $65 billion iShares Core S&P
500 [http://quotes.barrons.com/IVV] ETF (ticker: IVV) fell as much as 26%, some 20 percentage points below its fair
value. Disorderly trading affected big ETFs from every major provider: The $18 billion Vanguard Dividend
Appreciation [http://quotes.barrons.com/VIG] ETF (VIG) and the $12 billion SPDR S&P Dividend
[http://quotes.barrons.com/SDY] (SDY) plunged 38% apiece, while the  PowerShares S&P 500 Low Volatility
[http://quotes.barrons.com/SPLV] ETF (SPLV) fell as much as 46% before clawing back an hour after markets opened.

from: http://www.barrons.com/articles/the-great-etf-debacle-explained-1441434195

The Guggenheim S&P 500 Equal Weight ETF RSP, -0.03% [http://www.marketwatch.com/investing/fund/rsp?
mod=MW_story_quote] — for example — plunged intraday Monday by as much as 43% before gradually bouncing
back, as shown in the chart below. Quite a ride for the $10 billion in investor money parked in the fund.

Other ETFs showing similar price swings Monday were the PowerShares S&P 500 Low Volatility ETF SPLV, -0.03%
[http://www.marketwatch.com/investing/fund/splv?mod=MW_story_quote] down as much as 46%; the iShares Select
Dividend ETF DVY, -0.09% [http://www.marketwatch.com/investing/fund/dvy?mod=MW_story_quote] off 35% at one
point; and the PureFund ISE Cyber Security ETF  HACK, +0.72% [http://www.marketwatch.com/investing/fund/hack?
mod=MW_story_quote] which fell as much as 33%. [AOK, IJK, IAI, FDN, EMQQ, XBI were among many others].

from: http://www.marketwatch.com/story/heres-what-may-have-caused-the-flash-crash-in-some-big-etfs-2015-
08-25
One fund hit by the dislocations was BlackRock’s iShares Select Dividend ETF [http://quotes.wsj.com/DVY] ,
[http://quotes.wsj.com/DVY] which trades under the ticker DVY and holds shares of U.S. companies that consistently
pay dividends.
At 9:42 a.m. in New York on Aug. 24, the ETF tumbled 35% to $48, its lowest level of the day. At the time, the
combined weighted values of the stocks the ETF held was $72.42, down just 2.7% for the day, according to
FactSet.

from: http://www.wsj.com/articles/wild-trading-exposed-flaws-in-etfs-1442174925

As the Dow briefly dived by more than 1,000 points, or 6.6%, on that rough morning, big ETFs like the Guggenheim
S&P 500 Equal Weight ETF (RSP) and the PowerShares S&P 500 Low Volatility ETF (SPLV) traded down by more
than 40% at one point, disconnecting from the value of their stockholdings.
from: https://www.morningstar.com/news/market-watch/TDJNMW_20150922349/last-months-flash-crash-
dented-investor-confidence-in-these-funds.print.html

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There were many factors that caused ETFs' pricing problems. To begin with, NYSE invoked rule 48 at the open,
which  in  simple  words  meant  that  designated  market  makers  did  not  have  to  disseminate  indicative  prices
before the open. The rule was meant to ensure a faster and more orderly open. 

Then due to excessive volatility, many stocks and ETFs were halted for trading. Per WSJ, nearly 80% of about
1,300  trading  suspensions  were  for  ETFs.    Total  trading  halts  reported  on  Monday  were  almost  40  times  the
daily average this year. 

Further,  many  stocks  listed  on  the  NYSE  did  not  start  trading  for  more  than  10  minutes  while  BATS  and
NASDAQ exchanges started trading at the open. In other words, many ETFs were trading while their underlying
stocks were not. 

A  combination  of  all  these  factors  made  it  difficult  for  market­makers  in  ETFs  to  determine  the  right  price  for
underlying assets and price ETFs accordingly. This caused them to price ETFs with very wide bid­ask spreads
or just stay away from the market, since they did not want to take on too much risk when arriving at fair prices
was so difficult. 

Read  more:  http://www.nasdaq.com/article/3-important-lessons-from-the-etf-flash-crash-

Addl:
http://www.valuewalk.com/2015/09/transparency-interrupted-an-etf-reflection-on-august-24/
 View publication stats

http://millennialmoola.com/2015/08/24/was-vanguard-just-hit-by-a-flash-crash/
http://www.benzinga.com/opinion/15/08/5803575/flash-crash-2015-did-you-miss-it
https://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-october-
2015.pdf
http://sixfigureinvesting.com/wp-content/uploads/2015/08/ETF-Performance-in-the-Volatile-Equity-Market-of-
August-24-2015-1.pdf
http://etfdailynews.com/2015/09/14/etf-breakdown-in-the-mini-flash-crash-of-15/
http://www.hewinsfinancial.com/blog/the-curious-case-of-etf-illiquidity-in-volatile-markets

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Posted by Pankaj Agrrawal, PhD

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