Flash Crash Not Good News For ETFs

Olly, if you really believe the title of your blog, 'Flash Crash Was ETF’s Debutante Ball,' then it’s clearly time for you to put your turtleneck back on and go play more chess in Hahvard Yard.

Or head off to your tea-party-poetry-reading club. First, if I actually understand your blog title, I believe you’re claiming that the flash crash was a coming-out party for ETFs. Well, if that’s the case, it was a horror-show party of flesh-eating zombie debutantes.

Honestly, for you to blithely sit there and fiddle while
Rome is burning (see, I can do fancy historical allusions as well) is disturbing. Even if the flash crash had nothing at all to do with ETFs and was all about market structure (as I believe), it strikes me as more of an emperor is wearing NO clothes scenario than a coming-out party. The reason is that it underscores one extra layer of ETF susceptibility. There’s nothing in any regulations that prevents an ETF’s trading price from being a mile away from the NAV.

And I say this as an ETF guy, a true believer.

My takeaways from the May 6 flash crash are twofold:

1) Pay Attention! Do not use stop loss and market orders. Make sure that when you’re doing a big trade that it’s executed in the same ZIP code as the ETF’s underlying net asset value.

2) Wow—what a mess we’ve created on market structure. I do—like Olly—think they’ll get it figured out. The SEC and CFTC seem to be reassuringly on it, based on the engagement I’ve seen and the questions that are being asked. But frankly, this is a bit of lying in the bed that they made. All this incessant pounding on the theme of “best price” (which sounds like music to my ears as an investor) really ended up meaning “fastest price,” and somewhere around there is where the markets outran our regulators’ intentions.

But to say there’s nothing to worry about with ETFs doesn’t do justice to the gravity of the situation (which is grave and is, as yet, unsolved). It also makes you sound like a simple-minded rah-rah partisan, which is surprising coming from what is obviously such a complex mind as yours, Mr. Ludwig.