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Rating:Did ETFs' Deep Liquidity Set Some Investors Up For a Fall? Not Rated 0.0 Email Routing List Email & Route  Print Print
Wednesday, May 12, 2010

Did ETFs' Deep Liquidity Set Some Investors Up For a Fall?

News summary by MFWire's editors

Thursday's 1,000-point plunge in the Dow appears to have been particularly painful for exchanged-traded funds. The Wall Street Journal's Ian Salisbury describes the drop as a possible "blemish" on ETFs record as bastions of liquidity, and the WSJ's John Jannarone covers similar ground.

Meanwhile, in testimony yesterday before the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Entreprise, Securities and Exchange Commission (SEC) chair Mary Schapiro revealed that more than 25 percent of ETFs suffered a temporary drop Thursday afternoon of more than 50 percent. And Jannarone reports that, according to Credit Suisse's portfolio strategy group, more than two-thirds of all 'wild trades' on Thursday involved ETFs.

Jannarone muses that ETFs' deep everyday liquidity led to some investors and traders being comfortable placing automatic orders that specified only quantity, not price. (ETFs notably seemed to hold up well liquidity-wise during October 2008 and September 2001.) Then some market makers stopped trading Thursday afternoon and others saw their ETF bid-ask spreads widen very quickly, triggering some of those automatic, price-flexible trades. 

Edited by: Neil Anderson, Managing Editor

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