Based on the recent bout of volatility last week, State Street reached out to advisors to help explain what happened in the market and exchange traded funds.
Via conference call, David Mazza, Head of Research for SPDR ETFs and SSGA Funds, led a discussion on what occurred last week during the market correction and potential opportunities ahead.
To start off, David LaValle, US Head of ETF Capital Markets at State Street Global Advisors, explained how the nuances of different exchange structures impacted trading. While the Nasdaq and NYSE Arca where ETFs are listed are automated to open on 9:30am, NYSE has rules that delayed the opening in volatile market situations, which turned off automated market structure and went manual to discover prices. Additionally, due to the sudden volatility, a number of securities experienced trading halts. [What Happened with ETFs on Monday’s Mini ‘Flash Crash’]
Consequently, the “price discovery process was delayed,” LaValle explained, which contributed to the so-called mini flash crash that some ETFs experienced.
“In instances of extreme volatility, instances where there is a delay in market makers’ ability to gather data for individual components of an etf, it makes it difficult to calculate fair value of an ETF,” LaValle added. “Delayed opening and halts contributed to ability of market makers who could calculate fair value.”
Nevertheless, ETF traders may follow some best practices to help keep better control over trades. For instance, LaValle strongly advocates the use of limit orders and discourages market orders.
“While limit orders does not guarantee execution, it does give greater control,” LaValle said.
The market correction also created opportunities. Markets typically under or over react in short-term on headlines, Michael Arone, Chief Investment Strategist & Intermediary Business Group at State Street Global Advisors, said. Additionally, given the global accommodative policies, low interest rate environment and high corporate profitability, Arone argues that it is a reasonable assumption that stock prices could recover.