Nasdaq Cancels Trades Of ETN 'ICI'

April 14, 2011

The world of exchange-traded products has another episode of aberrant trading.

Nasdaq canceled a number of trades in the iPath Optimized Currency Carry ETN (NYSEArca: ICI) on Thursday under its “clearly erroneous” trades standard after the price of the ETN briefly shot up to almost 60 times its prevailing value before the episode, the result, apparently, of a sizable market order.

Indeed, one industry source said the spike was caused by a market order that dwarfed the ETN's average daily trading volume of 7,000 shares.

The aberrant ICI trades occurred between 1:10 and 1:13 p.m. Eastern time on April 14, Nasdaq said in an e-mail issued to subscribers of its “Trader Website” service. According to data compiled by Bloomberg, the highest canceled trade was at $2,682.19. The ETN closed at $46.05, down 35 cents from Wednesday's price.

“Pursuant to Rule 11890(b) NASDAQ, on its own motion, has determined to cancel all trades in security iPath Optimized Currency ETN (ICI) at or above $48.74 that were executed in NASDAQ between 13:10:00 and 13:13:00 ET,” the exchange said in an electronic communique to traders time-stamped at 1:45 p.m. Eastern time. Nasdaq noted its decision can’t be appealed.

Officials at iPath declined to comment, and a Nasdaq official declined to elaborate on the exchange's generic announcement that it had canceled ICI trades.

ICI’s canceled trades come two weeks after 10 of 15 new FocusShares ETFs had trades called clearly erroneous and canceled by both Nasdaq and the New York Stock Exchange after some of the funds briefly lost almost all of their value. That episode was due to a “process error” by the funds’ lead market maker, Knight Capital. All the ETFs have been trading normally since.

While tempting to compare the FocusShares canceled trades to the “flash crash” of May 6, 2010, it’s pretty clear the two episodes were radically different, even if they both resulted in ETFs trading as low as a penny.

In the FocusShares incident, the market maker mispriced securities in the ETFs’ underlying baskets, and was using market orders instead of limit orders, triggering the extreme drop in value. In the "flash crash,” sellers flooded the market, while buyers and market makers were nowhere to be seen, causing ultra-low “stub quotes,” which market makers used to leave in place, to turn into executed trades.

ICI is an ETN designed around an index that reflects the total return of an "Intelligent Carry Strategy," according to the iPath website. The indexing methodology seeks to capture the returns that are potentially available from a strategy of investing in high-yielding currencies with the exposure financed by borrowings in low-yielding currencies sometimes referred to as the "carry trade."

ETNs, or exchange-traded notes, trade like ETFs on exchanges, but are debt obligations backed by banks—Barclays, in the case of ICI. The note issuer guarantees the returns of the given index, minus expenses. While ETNs don’t have tracking error to their indexes the way ETFs do, they are dependent on the solvency of their issuer. Should the issuing bank go bankrupt, holders of an ETN could face the prospect of losing all the value of their investment.


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