ETFs Bearing Brunt of May 6 Drop Shows Hedging Worsened Losses

abattia · May 19, 2010

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax06VBKsx3HE&pos=6

nazzdack · May 19, 2010

Quote from abattia:
bloomberg....news
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Be on the lookout for new ETF's that claim to avoid illiquidity.

LeeD · May 19, 2010

This is quite a profound discovery:

While price declines in individual stocks contributed to ETF losses, the agencies said hedging strategies may have worsened declines and led to some of the dayâs biggest losses. For example, a trader trying to offset losses in a collection of individual shares might sell an ETF as a faster way to protect against market-wide declines.
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The less-known phenomenon:

Absent from the report is a finding that the NYSEâs program for slowing the market, so-called liquidity replenishment points in which trading is switched to manual auctions, widened stock swings. Rapid-fire price changes trigger the LRP auctions, potentially encouraging electronic orders to flow to other exchanges with few if any offers to buy shares
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ETFs Bearing Brunt of May 6 Drop Shows Hedging Worsened Losses

abattia

nazzdack

LeeD