Thebigc wrote:Anyone got any idea of how some of yesterdays ETF's are going to be priced in? Several ETF's dropped yesterday in 20 to 30% range in the first 5 minutes of trading. This occured because ETF's have no pricing rules, and market makers widen the price spread with higher volatility. However the underying assets never came close to dropping in that kind of value. Not only did this practice generate more panic, many investors attempted to buy in on those dips, but the ETF's don't have the ability to sell those assets at there own special discount, especially not 20 - 30%. So will this be adjusted in the buys which may mean some people who purchased can't cover, will the orders be cancelled, did be people who sold get their money returned?
I don't own any ETF's but that is really messed up, those are huge discounts and it seems they created a mess yesterday. Why are they even allowed to create their own price that does not reflect the value of the assets?
ThebigC's question kind of got lost in the shuffle today. I would be interested in people's thoughts on this, too.
Some of you may read the British financial blogger David Malone who writes as "Golem XIV" - a year or two back he wrote a couple of essays cautioning people to stay away from ETFs for reasons along these lines. Here's the link to his June 2013 essay, which includes links to two earlier essays where he goes into a lot more detail. http://www.golemxiv.co.uk/2013/06/etfs-a-warning/
He is most concerned about fixed-income ETFs, where he (and I) believe that the risks for discontinuity are highest, but I think these concerns apply more broadly.
ETF’s claim to make the exotic available locally, the volatile stable and safe and the institutional sized, available in bite sizes. And people have been buying into the promise of return without the risk – again....
Just like [mortgage-backed] securities and CDOs before them, ETFs and those who make the market in them, provide liquidity when all is well but when everyone really needs it, when large losses are being made – the liquidity disappears and instead we are told of ‘rare occurrences’ and ‘risk limits’....
As ETFs invade a market they essentially reduce the ‘free float’ in the underlying, which increases volatility; enables ‘macro’ manipulation over time (eg Hamanaka in copper, and current antics by the Saudis and the US in oil); and creates a disconnect with the reality of the underlying flows of value which leads inevitably – via the madness of crowds, the concentration of risk in single points of failure aka clearing houses and clearing banks and the wonders of technology eg HFT – to market discontinuities and meltdowns.
Yesterday might be a useful data point in considering the above, and I don't know any details as to what was going on (and we might be getting more data points in the last little while - that collapse into the close was something of a surprise, at least to me.)
Any one have any insights?