ETFs Bearing Brunt of May 6 Drop Shows Hedging Worsened Losses

[abattia]

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax06VBKsx3HE&pos=6

 

[nazzdack]

Quote from abattia:
bloomberg....news

Be on the lookout for new ETF's that claim to avoid illiquidity.

 

[LeeD]

This is quite a profound discovery:

While price declines in individual stocks contributed to ETF losses, the agencies said hedging strategies may have worsened declines and led to some of the day’s biggest losses. For example, a trader trying to offset losses in a collection of individual shares might sell an ETF as a faster way to protect against market-wide declines.

The less-known phenomenon:

Absent from the report is a finding that the NYSE’s program for slowing the market, so-called liquidity replenishment points in which trading is switched to manual auctions, widened stock swings. Rapid-fire price changes trigger the LRP auctions, potentially encouraging electronic orders to flow to other exchanges with few if any offers to buy shares