Social unrest in Greece, political uncertainty from the U.K. election, freezing credit markets in Europe and that growing puddle of oil in the Gulf of Mexico were already pressing on investors’ minds. Then the markets and exchange traded funds (ETFs) took a sudden plunge.
When the “market makers” who were suppose to provide liquidity didn’t do their jobs, fear spread through the equities markets on May 6, and stocks and ETFs traded at discounts of 50% to 90% of where they had been trading just moments before, writes Ron Rowland for Money and Markets.
Markets are volatile. This provides a chance to win big, or lose big, and someone out there definitely profited while others lost out. However, exchanges have already decided to cancel some of the “outlier” trades that were made when ETFs were at very high discounts to their original prices. The situation is under investigation and it could give rise to new rules, which may not be so good for the average investor. [How to Mitigate Market Volatility with ETFs.]
Rowland offers two lessons that an investor should take out of May 6:
- First, try to use limit orders and avoid market orders.
- Second, try to cogitate before placing stop-loss orders on ETFs, and update them if holdings rise in price. Stay well-informed and know what you’re getting yourself into.
ETFs were the biggest victims of the May 6 “flash crash” and not the culprit, remarks Joe Morris for Ignites. The Securities and Exchange Commission (SEC) is still unsure as to the cause of the price swing, but it is looking over and analyzing the trading records. Its findings are expected any day now. [How to Put Available Cash Back to Work.]
Almost 70% of ETF trades were canceled because of the extreme price plunges. ETF sponsors say there were no internal hitches in managing the funds that could be blamed in computing their end of the day net asset values. [How to Follow Trends.]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.