Behind SPY’s Monster $8.4B Redemption

World’s largest ETF had its biggest one-day net outflow in a long, long time. How’d that pan out in the market?

Reviewed by: Dave Nadig
Edited by: Dave Nadig

World’s largest ETF had its biggest one-day net outflow in a long, long time. How’d that pan out in the market?

The SPDR S&P 500 (SPY | A-98) posted a redemption of $8.4 billion last night. No matter how you slice it, that’s a lot of dough flowing out of a fund. So it’s perhaps worth looking at the trading activity that can result in that kind of flow, and what it can tell us about how the market’s working.

First off, a note on timing: Fund flows are calculated by looking at the reported-shares-outstanding numbers from ETF issuers, as reported through the National Securities Clearing Corporation. These numbers are almost always lagged.

Structurally, an authorized participant (AP) decides—at some point during the day—that she’ll be showing up to the window with a giant pile of SPY to redeem. She generally gets that notification into the fund company sometime before 3 p.m. ET, but the timing can vary.

After the market is closed, the redemption gets processed through the custodian (State Street Corp., in this case), and then in the overnight clearing process, the actual shares of SPY get destroyed, the shares of underlying stocks get moved to the AP’s account, fees are paid, and so forth.

Most of the time, the change in reported shares outstanding then happens on the “following” day, after everyone confirms everything worked out OK. I say “most of the time” because in my experience the lag can be anywhere from zero (you get yesterday’s activity reported this morning) to three days. The norm is one day delayed.

With that in mind, how do we interpret the $8.4 billion leaving SPY, or 44 million shares of redemption? I’m inclined to think of that as representing the trading activity for Aug. 4, Monday. And what did the really big trades on Monday look like?


This is the trade list for any trades more than 100,000 shares of SPY on Monday. It’s a few pretty big trades—those 500,000 blocks in the afternoon definitely pop out. But honestly, it’s nothing earth-shattering. In terms of trading days, Monday wasn’t even all that interesting. Here’s the chart:



It was actually an up day on relatively placid volume of just 91 million shares traded. And how do those big afternoon trades figure in?

The short answer is they don’t. If you look at the codes on the right-hand side of the tape, you’ll see “AP” for all of them. That means those prices you’re seeing represent the average price paid for a “worked” trade over a period of time. The price for almost all of them is in the mid-$192 range, which coincidently is pretty close to the volume weighted average price (VWAP) up until the last hour of the market.

VWAP trading—or variants—is incredibly common in institutional orders. We don’t know, but can guess, that these orders were sells, given that they’re all priced fairly low—well below the VWAP by the end of the day. But still, it’s hard for me to see where, on a day when 91 million shares trade hands, we get a 44 million redemption.

Which leads me to look at Tuesday’s trading:


Same filter—trades more than 100,000 shares—and boy, is there a lot more going on here. When I look at this tape, with more than a dozen prints of 500,000 shares, all at the same average price, I’m inclined to connect the dots to the previous day’s trading. Someone is getting out, and someone’s getting out big. For reference, here’s what the chart looked like Tuesday:



Charts courtesy of Bloomberg

That’s a little more interesting. Starting around 1:30 p.m. ET, the market started paying attention to these reported trades and decided it was time to stop helping whatever enormous institution was out there keep getting great prices.

Now here’s where it gets interesting. Nowhere in the course of trading Tuesday did SPY ever trade anywhere near $193.89, the price at which over 11 million shares were unloaded by whatever institution this was. So how is that possible?

Well, SPY closed the night before at nearly exactly that price. To my mind, the most likely scenario is that what we’re seeing here is an off-exchange, dark-pool cross of significant size.

Our phantom institution who wanted desperately out of SPY started working that trade on Monday. It got a significant portion done, but then waited until after the run-up in SPY to start floating the rest of its intention to sell—at the closing price—on a major dark pool, or more likely, across several dark pools. Those trades were negotiated and crossed before the market opened on Monday, and dribbled out into the reporting stream throughout the day.

And for whatever reason (perhaps because the trades happened before market open), the resulting redemption activity is showing up today, not tomorrow.

It’s just a theory, of course. I’m positing that these were sells at very good prices mostly because of the net redemptions—it implies there was just enough pressure somewhere in the system for an AP to arbitrage out a penny of price discrepancy by taking the other side of the sell order, and selling underlying securities at a slightly better price to hedge things out, knowing they’d get the basket from State Street to deliver. There’s no way of actually knowing, for sure, but it’s the logical explanation to me.

And how did all of this affect you and me, mom-and-pop holders? Not at all. Throughout this, SPY tracked its fair value like white on rice. Sure, the big drop in the S&P 500 was likely exacerbated by SPY sellers, but, guess what? That wouldn’t matter if you were in SPY or a mutual fund, or futures, or individual stocks. Institutions use whatever vehicles are most efficient, and when they get out, things go down, regardless of the vehicle.

And as for reading the tea leaves with fund flows? As I say every time: Be careful, because the data is a minefield.

At the time this article was written, the author held no positions in the security mentioned. Contact Dave Nadig at [email protected].


Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.