Walmsley: Greek ETF Will Correct Quickly When It Re-Opens

The Europe-listed Greek equity exchange traded fund (ETF) should “correct quickly” when the Athens stock exchange re-opens, predicts Gillian Walmsley, head of fixed income products at the London Stock Exchange.

While Greeks bank re-open today after a three-week hiatus, its stock exchange remains firmly closed. Meanwhile, stock exchanges across Europe, except from Stuttgart, halted trading of the Lyxor UCITS ETF FTSE Athex 20 (GRE), halting both primary and secondary market trading due to the lack of pricing information for the underlying market.

As market participants start to question what will happen to its U.S.-listed counterpart, GREK, which remains open for trading, Walmsley said the Lyxor fund in Europe should not witness a significant arbitrage when Greece opens up its exchange.

“If there’s sufficient liquidity and there are market makers quoting prices, you shouldn’t get that significant an arbitrage,” she told ETF.com. “It should correct quite quickly.”

The fund’s net asset value has been frozen for three weeks, based on the last trading price on 29 June. Over the past 12 months to the trading halt, investors would have lost over 37 percent of their investment.

Commentators have called for the Europe ETF to be a tool of price discovery, even when the market is closed, and Walmsley said she could see both points of view – but ultimately they pulled the fund on the Borsa Italiana as there was not enough “price information”.

“Depending on when the market opens and the reference price, there could be a series of trading halts,” said Walmsley. “If the opening price is significantly away from the last trading price, we close for five minutes, subject to extension: it’s a protection measure to make sure nobody trades in error, to prevent against the likes of a flash crash.”

The extent that the price has to move to call a circuit break depends on the liquidity of the securities. A note from the LSE read it could be a 3 percent swing for the FTSE 100 and “[…] for more illiquid small cap or AIM stocks, the dynamic price threshold may be 10 per cent, 15 per cent or 25 per cent.”

Walmsley said this “circuit break” has been applied to other funds and stocks before and provides a “period of reflection” for people to place their orders without seeing the market dropping. This activity is also common during holidays, for example Christmas Eve and New Year’s Eve.

Walmsley added that investors should keep an eye on the index when the ETF re-opens.

Meanwhile, some 14,000 companies have suspended trading in China to stem panic selling as investors unwind their leveraged positons, but China ETFs continue to trade.

“We haven’t suspended trading on China ETFs,” confirmed Walmsley. “If there’s not enough price information for the index we would take a view on closing the ETF[s].”