Although exchange traded funds have been blamed for higher market volatility, there are larger forces at work in the markets driving extreme price swings, a Nasdaq executive said Wednesday at a Senate subcommittee hearing on ETFs.
“These are volatile times in our markets. In difficult times it is natural to look for a cause that can be easily identified and even fixed. Exchange traded products are a tempting target,” said Eric Noll, head of transaction services at Nasdaq OMX, in prepared testimony. [Previewing the ETF Hearing]
“But restricting or eliminating the ETP business will not solve the sovereign debt crisis in Europe, will not balance the U.S. budget, will not restore bank balance sheets, will not add jobs, and will not repay consumer debt and get them spending again,” he said before the Subcommittee on Securities, Insurance and Investments. “There are very large, very real uncertainties that are driving global financial market volatility.”
The Senate subcommittee was holding a hearing Wednesday to examine the impact of ETFs on market structure, and if the financial products are exacerbating volatility and rising correlations in the markets.
In the Q&A session, Noll said in volatile times, it is common to see correlations rise. He said investors are more concerned with protecting themselves from declines than picking individual stocks. This isn’t a function of indexing and ETFs, but rather of investor perception and economic uncertainty, Noll added.
He pointed out that Apple (NasdaqGS: AAPL) shares are widely held in indexes, but the stock’s performance has varied greatly from the overall market.
In response to claims that ETFs disrupt small business capital formation, he said he’s never heard of a company not going public because it didn’t want to be included in a small-cap index.
Also, he said there is no evidence that ETFs add to market volatility in general or at the end of the trading day.
“In fact, ETPs provide investors with very valuable diversification, hedging and risk management opportunities. For those reason ETPs have grown rapidly in popularity over recent years and it is not uncommon for trading in ETPs to increase on volatile days,” Noll said.
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