“Without HFTs, ETFs would act more like closed-end funds, which frequently move to wide premiums or discounts to their NAVs. That issue does occur with some ETFs, often following an issuer’s decision to limit or suspend creations of new shares.

Without the HFT, the price of the ETF might rise and be disconnected from the underlying value of the index it is trying to track. This is how closed-end funds work. Yet most ETFs are pretty good at following their respective index. That’s because once an investor starts to bid up the ETF, the HFT in, offering the inventory for sale that they have built up. HFT simultaneously make a market for up to thousands of stocks,” wrote Axel Merk in a Forbes piece published soon after the debut of “Flash Boys.”

SPDR S&P 500 ETF

 

Tom Lydon’s clients own share of SPY.

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