In an attempt to obviate another mini-flash-crash scenario, the New York Stock Exchange has outlined a system to flag “aberrant” trades in exchange traded funds.
“The Exchange believes that the derivatively priced nature of ETPs necessitates the use of a different, and generally broader, set of circumstances to determine that trades are ‘aberrant,’” the NYSE said in its proposal to the SEC, reports Leslie Josephs for the Wall Street Journal.
The NYSE proposes that trades don’t reflect “the prevailing market” for an ETP if it is 50 cents away from the previous trade or a reference price if the price is $100 or below, and 50 basis points away if the trade or reference price is over $100.
Additionally, the exchange will consider other factors, like changes to the index the products are tracking and shifts in creation or redemption of shares – traditional beta-index ETFs try to reflect the performance of an underlying index, and shares are created or redeemed with baskets of underlying component stocks.
Some trades could create prices that do not reflect the “price discovery in the fund holdings…and could impact statistics for the investment fund as computed by third parties in a way that is inappropriately reflective of very short-term market impact rather than ongoing fund performance, leading to investor confusion,” according to the NYSE.
The SEC has been putting ETFs under greater scrutiny after the wild swings during the open of August 24 when several exchange traded products traded at steep discounts to their underlying holdings. [The ETF ‘Mini Flash Crash’ Examined]
Some ETF critics have jumped on the mini crash as a red flag for the ETF investment vehicle. However, the ETF industry has countered that the ETF products are working as intended and that the real problem involves the market structure, which the NYSE’s proposal hopes to address. [AllianceBernstein Thinks ETFs ‘Aren’t Safe’]
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Max Chen contributed to this article.