The 2010 Flash Crash and the Knight debacle this summer are reminders that the difference between market and limit orders is important to ETF investors and traders. [Five Lessons for ETF Investors After the Knight Meltdown]
Last week, in the aftermath of Hurricane Sandy, Knight Capital (NYSE: KCG) announced Wednesday that its backup power generation system had failed, leading the firm to shut down all trading and direct orders to other brokerage firms for several hours, Morningstar reports.
Knight is an important market maker in ETFs that helps provide liquidity and keep trading spreads as narrow as possible.
“While Knight is the lead market maker for ETFs, there are other firms out there that can pick up the slack (and have done so),” writes Morningstar’s Robert Goldsborough.
“Given the shaky power situation right now in the New York/New Jersey region, we recommend that investors avoid using market orders when buying ETFs. Instead, investors should watch a fund’s bid-ask spreads closely and use limit orders only,” he added. “Some of these same concerns apply to stock investors, but we believe they are far more pertinent to ETF investors, since market makers are so critical to the way that ETFs come to market.”