ETF providers scramble to put Aug. 24 'flash crash' in rearview mirror

One-year anniversary shows lots of effort to calm nerves, rebuild investor trust

Aug 23, 2016 @ 10:30 am

By Jeff Benjamin

If there is an upside to the Aug. 24, 2015 “flash crash” that saw volatility spike and trigger nearly 1,300 individual trading halts, it is that the asset management industry and the exchanges are now scrambling to work with regulators to prevent a repeat of that infamous day.

“The best thing about it is the coming-together moment for the industry and the regulators,” said Eric Ervin, chief executive of Reality Shares.

Closing in on the one-year anniversary of the shock market disruption that saw 19% of all exchange-traded funds decline by 20% or more, the major interested parties appear eager to do whatever it takes to restore investor confidence.

“Most people would agree that the ETF is not going away, so let's figure out what needs to be done to make it better,” Mr. Ervin said. “After the [Aug. 24] event happened, all the major providers came together and put up a proposal. And we're now starting to see some of those changes take place.”

Among the most significant changes, according to Mr. Ervin, is doing away with some of the rules that trigger trading halts of securities based on preset volatility levels.

The automatic trading halts that kicked in last August have been credited with lighting the fuse that caused the extreme price swings and a lack of liquidity for some ETFs.

Without a clear idea of where the underlying securities should be priced, market makers that are supposed to provide ETF liquidity essentially stepped back and away from the calamity until the dust settled.

For some financial advisers, who had preset orders to sell when an ETF price dropped below a certain level, the outcome was catastrophic.

Theodore Feight, owner of Creative Financial Design, said his clients lost $5.5 million within three minutes of the Aug. 24 opening bell.

He said the experience not only “shook me to the core,” but Mr. Feight has since sworn off stop-loss orders for ETFs.

In a December report by the Securities and Exchange Commission, the details of what happened during the flash crash were laid out, but there was still no clear explanation of how it happened, or how it could be prevented in the future.

But the various market participants have since come forth in a show of solidarity to try and fill the gaps that were exposed a year ago.

That solidarity was in full view in a March 10 letter to the SEC, which was signed by a virtual who's who of the ETF industry, campaigning for revisions to rules related to liquidity and automatic trading halts.

“I think steps have been taken to make the process better, and give investors more confidence,” said Todd Rosenbluth, director of ETF research at S&P Global Market Intelligence.

Mr. Rosenbluth, who recently moderated a panel discussion on the topic of last year's flash crash, cited as an example of the new cooperation in the form of an announcement from three major exchanges to petition the SEC for some rules revisions.

Bats Global Markets, Nasdaq and the New York Stock Exchange announced last week they plan to file with the SEC a set of exchange rule changes as well as a plan to address extraordinary market volatility.

The exchanges' petition will focus primarily on reducing trading halts by revising the circuit-breaker system that triggers trading pauses.

“One of the positive effects of Aug. 24 was clarification of the rules when trades will and will not be broken if they happened inside (certain preset trading bands),” said Reggie Browne, head of ETF trading at Cantor Fitzgerald.

“Today, there is increased confidence by liquidity providers when to interject into the market,” he added.

David LaValle, U.S. head of the ETF capital markets team at State Street Global Advisors, stressed that Aug. 24 was “an equity market structure event, not an ETF event.”

As a representative of a company with $464 billion worth of ETF assets, Mr. LaValle has a stake in both calming investor nerves about ETF volatility and liquidity, and contributing to improving the system.

“We're actively engaged in conversations with our regulators and the exchanges to enhance changes,” he said. “We're not going to remove volatility from the marketplace, but I'm confident that enough has been changed that we would have a more efficient price discovery process in times of stress in the future.”

Andrew Chanin, chief executive of PureFunds, agreed that revisions are needed to trading-halt rules, but also said Aug. 24 should have taught investors and financial advisers about the risks of using stop-loss orders.

“We saw some ETFs trading down as much as 30%, which is an arbitrage-traders super bowl,” he said. “What we really saw was an incredible arb opportunity for those with some foresight. The lesson is that these types of major swing moves can present investing opportunities.”


What do you think?

View comments

Recommended for you

Upcoming Event

Nov 13


Best Practices Workshop

For the sixth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video


Gender Financial Discrimination

Kathleen Burns Kingsbury lays out a few concepts for how men can, and need, to be involved in solving the issue.

Latest news & opinion

Trump said 'you're fired' to this adviser on TV in 2005, then LPL fired him for real in 2018

Louisville adviser Mark Lamkin was terminated by LPL, in part for failing to disclose outside business activities.

What not to do when working with couples

These are moves advisers should avoid when they are working with couples as clients.

Private Ocean grows to $2.2 billion with acquisition of Mosaic Financial

Combined financial planning operation gives the firm an expanded footprint in the San Francisco area.

Joe Duran has a game plan, and anyone can play

The CEO of United Capital built a formula for holistic financial planning that any firm can tap into — for a price.

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print