Traders were calling the move to reverse trades unprecedented, and were at a loss to explain exactly how exchanges would be able to unwind the trades that were executed during the period of feverish selling
“There are so many settlement issues and clearing issues, I don’t know how they’re going to do it. It’s unprecedented, really,” said Paul Weisbruch, vice president of ETF sales and trading at Street One Financial, a King of Prussia, Pa.-based firm that specializes in ETF trading.
Weisbruch said the broad moves by Nasdaq and the NYSE to cancel trades will unfairly punish investors who were patiently waiting for a chance to buy when the market turned cheaper.
“For someone to say: ‘Oh, we’re going to reverse that because it was a mistake,’ is taking money out of the pockets of people who were astute enough to have limit bids out there,” Weisbruch added. “If they take those trades away, it takes away the confidence of the investor.”
It’s worth noting that throughout the crisis, the indicative NAV system—the system that publishes estimates of the “fair value” of ETFs—appears to have functioned smoothly. Although indicative NAV values dipped, a survey of select ETFs by IndexUniverse showed none of the irrational trading behavior of the affected ETFs. A trader who had either a mechanical or human system in place to check iNAVs before trading ETFs would not have sold shares at the low levels.
Under The Hood
In trying to assess what actually happened, IndexUniverse.com looked at one of the many ETFs that traded, literally, below a penny—the Rydex S&P Equal Weight ETF (NYSEArca: RSP). Its chart around 2:50 p.m. EDT Thursday is typical:
It will take some time to know precisely what happened, but one thing is clear: This was not the result of a single large player making a single bet. The damage happened quickly. At 2:45:05, 100 share lots of RSP were trading around $39, down for the day, but not catastrophic. Over the next 31 seconds, that price deteriorated over a few dozen trades, finally printing the last “rational,” but still scary, price of $24.50, at 2:45:36.
The very next trade is for 15 cents. That’s $0.15/share.
Immediately, a hundred or so trades on NYSE Arca ran through for $0.10/share. By 2:45:37, Nasdaq machine-trading caught up, and hundreds of trades rolled through for 100 shares each at a fraction of a penny.
By 2:46 p.m., some level of rationality returned to the market, with trades printing from $10 to $40.
Friday morning, all those penny trades were canceled. However, the damage that was done was very real for some investors, somewhere. Hundreds of RSP trades from $10 to $30 remain valid, and the losers in those trades are the victims, clearly, of what will inevitably be referred to as a “glitch.”