The largest exchange traded funds have weathered the turmoil in the aftermath of the Knight Capital Group (NYSE: KCG) market mess with generally tight spreads and no disruptions.
However, some of the lightly traded, less liquid ETFs have reportedly seen the spread between bid and ask prices widen significantly.
Bloomberg, Reuters and others have picked up a well-researched piece by Dave Nadig at IndexUniverse on how ETFs that normally trade less than 50,000 shares daily have seen spreads widen.
“But it gets worse. For those low-liquidity ETFs for which Knight is the lead market maker on the NYSE, spreads have ballooned from 0.49% on average to a whopping 1.53%,” Nadig writes. [Knight Debacle Raises Concern Over ETF Trading, Liquidity]
‘Pick up the slack’
Knight is a major ETF “authorized participant,” the firms responsible for making markets and providing liquidity in the exchange listed funds that trade during the day.
The firm’s shares have been hammered and Knight is facing hundreds of millions of dollars in losses after a trading glitch roiled the market Wednesday morning.
“ETFs are dependent on third parties” to make markets, Paul Justice, head of ETF research in North America at Morningstar, told Bloomberg. If Knight collapses, “there would probably be a temporary gap in liquidity until someone else steps in with that volume,” Justice added.
“Even in the worst-case scenario, there’s an awful lot of quality competition that will be more than willing to jump in and pick up the slack,” Nadig told Bloomberg.