ETF spreads widen without Knight Capital

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xerty24
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ETF spreads widen without Knight Capital

Post by xerty24 »

On Wednesday, NYSE rolled out a new system for sub penny quotes and one of the big market makers, Knight Capital, had a catastrophic software glitch in their market making algos related to this technology change. Long story short, they lost $440M in an hour or so and their future as a going concern is unclear. As you may not know, Knight is a huge market maker, especially in less liquid securities, and their absence over the past 2-3 days has caused major effects on these markets. Some brokers have refused to accept orders for illiquid securities and spreads for many of the rest have gotten much worse.

http://www.reuters.com/article/2012/08/ ... HC20120803
the average spread for the 549 illiquid ETFs for which Knight acts as the lead market maker widened threefold.

"If ever there was a time to stay away from illiquid ETFs, it's now," said Dave Nadig, director of research at IndexUniverse. "Some of these ETFs are trading at uninvestable highway-robbery spreads because Knight just wasn't there to regulate the pricing of those ETFs."
Spreads increased from 0.5% to 1.5% on many less liquid ETFs. VSS, a popular international small cap ETF, fits the definition of "less liquid" for these purposes.
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Cash
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Re: ETF spreads widen without Knight Capital

Post by Cash »

Very interesting. Coincidentally, I purchased several shares of VSS on Wednesday. I didn't notice a problem (fully executed within half an hour or so of my order).
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tc101
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Re: ETF spreads widen without Knight Capital

Post by tc101 »

I purchased several shares of VSS on Wednesday. I didn't notice a problem (fully executed within half an hour or so of my order).
There would be no problem buying or selling, but do you remember the difference between the buy price and sell price? That is the spread.
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Cash
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Re: ETF spreads widen without Knight Capital

Post by Cash »

tc101 wrote:
I purchased several shares of VSS on Wednesday. I didn't notice a problem (fully executed within half an hour or so of my order).
There would be no problem buying or selling, but do you remember the difference between the buy price and sell price? That is the spread.
My mistake, I bought on Tuesday. I bought at $81.41, which was only a couple of cents above the bid at the time of my order. It looks like the low price of the day was $81.38, so I came out pretty well. Will have to monitor this for next month's contributions.
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Re: ETF spreads widen without Knight Capital

Post by VennData »

Vanguard not using Knight.

http://in.reuters.com/article/2012/08/0 ... 1020120802

So are the AP's of VSS et all getting picked off further by the HFTers? Or is the less-than-a-penny spreads the cause?

These systems have been developed to keep the big players in the middle. With so much liquidity the entire bid/ask model is unnecessary. One price. That is all you need, if no one is buying, it drops... no one selling, it rises. If it drops ten percent, it's a buying opportunity. The bid/ask model is archaic.
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tc101
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Re: ETF spreads widen without Knight Capital

Post by tc101 »

The spread right now on VSS is about 2%. Is that higher than normal?
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Ketawa
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Re: ETF spreads widen without Knight Capital

Post by Ketawa »

tc101 wrote:The spread right now on VSS is about 2%. Is that higher than normal?
I think you're just calculating it incorrectly. The spread right now is $0.19 for an $83 share, or 23 bp. This is below the average that Vanguard gives here of 29 bp. https://advisors.vanguard.com/VGApp/iip ... daskspread
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tc101
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Re: ETF spreads widen without Knight Capital

Post by tc101 »

You are correct. I used to be able to do math quickly and accurately in my head. I'm like an old guy who remembers his youthful athletic ability and goes out to play and is surprised when he gets hurt.
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Doc
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Re: ETF spreads widen without Knight Capital

Post by Doc »

From xertys link:
For illiquid ETFs, or those ETFs that trade less than 50,000 shares per day, market makers like Knight make sure that trades get executed at prices within the bid and ask range.
Sometimes transaction costs on low volume ETFs more than offset slightly higher e/r's on more liquid alternatives.
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Re: ETF spreads widen without Knight Capital

Post by Alskar »

VennData wrote:Vanguard not using Knight.
I suppose that depends on what you mean by "using". Virtually ALL of my trades of Vanguard ETF's through my Fidelity account have been with Knight Capital. Fidelity trade confirmations show the purchaser/buyer and all of them that I've been able to find show "Knight Capitol".

Furthermore, this article: http://www.cnbc.com/id/48528528 implies that Vanguard was using Knight Capitol before the meltdown last Wednesday.
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Re: ETF spreads widen without Knight Capital

Post by tfb »

Alskar wrote:Furthermore, this article: http://www.cnbc.com/id/48528528 implies that Vanguard was using Knight Capitol before the meltdown last Wednesday.
Vanguard Brokerage Service's order routing report: http://www.marketsystems.com/reports/1- ... omain=true

25%+ of the orders went to Knight Capital in Q2 2012.
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Re: ETF spreads widen without Knight Capital

Post by grabiner »

Ketawa wrote:
tc101 wrote:The spread right now on VSS is about 2%. Is that higher than normal?
I think you're just calculating it incorrectly. The spread right now is $0.19 for an $83 share, or 23 bp. This is below the average that Vanguard gives here of 29 bp. https://advisors.vanguard.com/VGApp/iip ... daskspread
I bought some VSS this morning and the spread appeared to be normal; it was between 20 and 35 cents while I was trading except when my bid was part of the spread (and when my bid was the best bid, Level 2 quotes showed that the next best bid was about 30 cents below the ask). It didn't even open at a one-dollar spread, which I have often seen.
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Re: ETF spreads widen without Knight Capital

Post by nisiprius »

I can recognize FUD* when I see it, even if it happens to be FUD I'm in tune with. But I'm posting the link anyway, and feel the animated GIF is worth watching--even though I think any exponential trend might look the same.

Felix Salmon, Chart of the day: HFT edition. Salmon opines:
inevitably, at some point in the future, significant losses will end up being borne by investors with no direct connection to the HFT world, which is so complex that its potential systemic repercussions are literally unknowable. The potential cost is huge; the short-term benefits are minuscule. Let’s give HFT the funeral it deserves.
*Propaganda designed to instill Fear, Uncertainty, and Doubt. Don't know the origin but I became aware of it in the 1970s when the term was used to described IBM's marketing technique--encouraging customers to stick with IBM out of fear, uncertainty, and doubt about competitive products.
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xerty24
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Re: ETF spreads widen without Knight Capital

Post by xerty24 »

nisiprius wrote:I can recognize FUD* when I see it...
Felix Salmon wrote:Let’s give HFT the funeral it deserves.
I'm happy to report your FUD detector is working well. Read the replies below and you'll see the blogger getting the flogging he deserves for his uninformed rant.
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