While liquidity providers were bombarded with heavy sell orders, market makers would have also needed to hedge the added long positions. However, they were also struggling with valuations for their own ETF holdings and were unable to sell futures.

“Pricing and valuations feeds are critical to market makers in any derivative, by definition,” according to KCG. ” On August 24, multiple breakdowns in market continuity and pricing combined with above average volatility to make market makers very unsure about their model valuations.”

Nevertheless, despite the extreme price fall during the height of the volatility, the most liquid ETFs were quickly back on their feet in no time, with spreads reduced and pricing returning to NAV.

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Max Chen contributed to this article.