A Very Broken Day For One ETF

Yesterday’s broken trades highlight why smart trading matters.

Yesterday’s broken trades highlight why smart trading matters.

Everyone saw that yesterday was a volatile day. But the overall market volatility was nothing compared with what we saw in the Credit Suisse FI Large Cap Growth Enhanced ETN (FLGE).

You can be forgiven if you’re not familiar with the ticker: FLGE launched just this past June, providing double-leveraged exposure to the Russell 1000 Growth Index. But despite being new, it’s already a classic broken ETN.

Finding information out about the ETN is nearly impossible—it’s not even listed on Credit Suisse’s own page. If you go to the bank’s website and type in the ticker, you’ll get no results. If you call the Credit Suisse help desk, they’ll let you know that while it’s their debt, they don’t even have fact sheets or prospectus documents available, because the fund was made specifically for Fisher Asset Management, Ken Fisher’s firm.

The only way to figure out what the thing even does is by trolling the SEC filings for the original paperwork.

Barely On The Rails

In the months after launch, the fund had a little bit of outside interest, and even racked up a few 100,000-share trading days. But spreads have been enormous—more than 10 percent in some cases—and volume has plummeted to the few-thousand-shares-a-day range.

If you looked at FLGE on the close yesterday, you wouldn’t notice much interesting. After all, it closed right around fair value. But here’s what the intraday chart looks like:

Clearly something interesting happened around 2:25 p.m. ET, as there’s a print on the tape for far under fair value. But it’s much worse than that. This is the corrected version of what happened. But that chart looks actually sane compared with what happened with the bid and the ask for shares of FLGE during that period:

Going Off The Rails

There was, until 1:25, an orderly market in FLGE. But then, at 1:25 and 35 seconds, someone just decided they were no longer interested in buying FLGE from anyone, really, at any price.

What follows is largely guesswork, and I apologize for the hastily Photoshopped-together tapes, but I like to construct a story around trading like this while it’s still fresh and they haven’t “corrected” the data.

My thinking here is that this is a classic case of market makers going out for lunch.

Imagine your job is to be a market maker in FLGE. Well, at some point, you don’t actually want to be buying or selling, and so you move your price out of the market until you’re no longer at any risk of accidently getting hit on your offer to buy 100 shares.

All market makers have their own systems for that, and what I see here looks an awful lot like someone hitting the “do not be on the inside” button on their algorithm.

(Note: These tapes read from the bottom up, by time.)

All in the course of a second, whoever this is walked their best bid for FLGE from $87.24 down to slightly more than $45. I like to imagine a little gremlin in the black box saying, “$84? Darn, I’m still gonna get hit. $80? Nope, nobody else stepping in. $70? Come on guys, I just want to get a sandwich.”

Ten seconds later, the gremlin starts working out the other side of the spread, raising the price at which they’ll sell FLGE until there’s no danger of anyone actually buying it from them.

A Train Wreck Recounted

So, in the course of 10 seconds, we go from a perfectly normal—if wide—market for FLGE at $87.27/$88.81 that walks out to $45.34/$134.50. Those are “stub quotes.” Nobody is ever supposed to go anywhere near them.

In fact, in almost any security, nobody would ever even see them because there are other market participants willing to make a killing buying and selling far inside those quotes. Until this poor guy showed up with a market order to buy 153 shares of FLGE an hour later.

Cue the “whah-whah-whah-whaaaaah” sad trombone.

That one trade kicked off a cavalcade of small trades, as (I’m guessing) various algorithms now saw a “live” price for FLGE that was 50 percent below its previous trades. It’s the kind of panic-move that black boxes everywhere are sniffing for.

Beware Market Orders

The irony here is that that bad trade that triggered the insanity came in exactly when someone else stepped in with rational quotes of $83.99/$86.72.My guess is that the order of arrival at NYSE Arca (where most of these trades were done) simply got the trades ahead of the rational quote, and it took a few minutes to shake out.

At the end of the day, most of these trades were in fact canceled and repriced at something resembling the real quotes, but still well under fair value.

So the moral of the story here is simple: Tiny ETFs can be traded, but you need to recognize you’re walking into a minefield. There is no competition among market makers to make a market for funds like FLGE. There’s a guy, on a desk, with a program. And sometimes he needs to eat.

So for heaven’s sake, never, ever put in a market order. Especially at lunchtime.

At the time this article was written, the author held no position in the security mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.