Monday, August 24, was a rough day for U.S. stock markets and for some ETF investors. Negative news out of China sent the markets on a wild ride, and for a brief time, ETF pricing information struggled to play catch-up, with some ETF investors caught in the middle. It was an unfortunate series of events that the market makers and exchanges eventually worked through.
In my mind, it was like getting a bad meal at a four-star restaurant. The head chef is out sick, the delivery truck gets stuck in a traffic jam on the turnpike, and a local convention delivers a torrent of new customers. Minor problems escalate, which results in your being served a wilted salad and a lukewarm steak. But within hours, the professionals sort everything out and fine-dining resumes. In the same way, what happened on August 24 was an anomaly—an extreme blip that shows just how efficiently the markets function almost all the time. The event was only noteworthy because of how rarely things like this normally happen.
That said, it’s clear there are some market-structure issues that we think could help mitigate the kind of dislocation experienced on August 24, if not outright prevent it from happening again. For example, the limit up-limit down bands halted trading as the stock markets were falling, but they also caused a pricing lag as the markets attempted to bring ETFs off their lows and closer to fair value. That, in turn, led to wider bid-ask spreads and less available liquidity for many ETFs during the market turmoil. Vanguard believes there may be ways to tweak how these bands operate, and we’ll continue to work with our industry partners to foster liquidity, price discovery, and investor protection so the markets function smoothly even when they are volatile.
Trading in volatile times