ETF Volumes Dive More Than Market

August 06, 2013

Where DEM was trading nearly 2 million shares a day in June, it’s fallen to about 800,000 shares a day. For almost any investor, this is great liquidity, and it’s been bid a penny or two wide throughout these volume spikes and dips.

So where do you start getting in trouble? Let’s take a look at the SPDR Nuveen High Yield Muni ETF (NYSEArca: HYMB).


Here’s where the crazy stuff was really happening in June, as munis got clobbered and HYMB lost significant value.

The fund was trading hundreds of thousands of shares a day, and all sorts of useful price discovery for illiquid munis was taking place thanks to ETF traders.

Now, however, we face the ketchup bottle problem. You may have tried to grab the falling knife back in June, and are sitting on shares you need to push through 5-cent spreads and very low daily volume.

Here’s where smart trading would really matter. If you’re sitting on 30,000 shares of HYMB bought at the low of 51.23 in June, there’s no guarantee you can realize the gains you’ve made. In fact, based on the posted book, you may not even really have any gains, despite the “last price” on this chart:

HYMB Level 2

To move 30,000 shares through this thin book, you’re going to start hitting bids at 51.14. Of course, smart trading—either by working this trade very carefully or through a liquidity provider—could probably do a lot better than that, but dumb trading would wipe out any gains you’re feeling good about.

And lastly, let’s look at an ETF that was already having some liquidity issues—the United States Brent Oil ETF (NYSEArca: BNO):


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