Shares of Knight Capital Group (NYSE: KCG) were down more than 50% Thursday morning following the previous session’s 33% drubbing after the embattled firm announced a $440 million loss related to a trading glitch that roiled markets.
Knight’s troubles are causing some to wonder if exchange traded funds could be impacted because the firm is a major so-called authorized participant responsible for making markets and providing liquidity in ETFs.
“Knight is a large AP for ETFs,” said Sal Arnuk, co-head of equity trading at Themis Trading, in an email.
Because Knight provides liquidity for so much of the ETF industry, investors should keep an eye on spreads, he said Thursday on Twitter.
“I was wondering out loud what it would mean for ETF liquidity,” Arnuk said.
A Vanguard spokesman said the firm’s ETFs continue to trade normally. “We work with a number of market makers throughout the world, which gives us a certain level of confidence,” he said.
‘Technology issue’
Knight is an authorized participant “for most ETF fund families in the U.S. and across the European landscape,” according to its website.
Some utilities ETFs were indirectly affected Wednesday by Knight’s trading glitch when the funds’ underlying holdings briefly surged in price. [Algos Gone Wild: Utilities ETFs ‘Flash Smash’]
“Knight experienced a technology issue at the open of trading at the NYSE yesterday,” the firm said in a press release Thursday. “This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. This software has been removed from the company’s systems.”
Although the company’s capital base “has been severely impacted, the company’s broker/dealer subsidiaries are in full compliance with their net capital requirements,” it said. “Knight will continue its trading and market making activities at the commencement of trading today. The company is actively pursuing its strategic and financing alternatives to strengthen its capital base.”
‘Other firms are filling in the void’
Paul Weisbruch, vice president of ETF and options sales at Street One Financial, in a telephone interview Thursday said the Knight situation shouldn’t meaningfully impact ETF trading spreads.
“The news is out there. It’s not a systemic issue or a flash crash issue. It’s not a uniform glitch for all firms, but rather just one,” Weisbruch said. “Other firms are filling in the void and other market makers are getting more active.”
Regarding ETF trading spreads, “any difference or impact will be mitigated by other arbs coming into the picture,” he added. “ETFs are very efficient in terms of the wide spectrum of market makers involved and keeping prices inline.”
“We saw some crazy moves in utilities ETFs yesterday, but it all went back to parity by the end of the day,” said Scott Freeze, president of Street One. “The ETF market isn’t in a flash crash. ETFs aren’t dangerous – it was an issue in the underlying stock baskets.”
Knight is one of many firms that are APs for ETFs.
Freeze says he doubts wider spreads will occur in ETFs. If they do get wider than usual “the other APs and market makers should continue to keep tight and orderly markets, and keep the markets tight for investors.”