As regulators and stock exchange officials discuss putting rules in place to make sure that the market volatility of May 6 never happens again, exchange-traded-fund providers are making sure considerations are made for their offerings.
More than two-thirds of the trades cancelled after the dramatic market plunge on May 6 were in exchange-traded funds. While no one has identified a single cause for the unprecedented market volatility, Securities and Exchange Commission Chairman Mary Schapiro said during congressional hearings this week that the agency is discussing so-called flash-crash rules, including requiring stronger market circuit-breakers and new brakes on single securities.
ETF providers want to ensure that any brakes would also address volatility in ETFs, officials said. “While this is an overall securities market issue, we want to make sure that the solutions that are proposed also work for ETFs,” Noel Archard, iShares managing director at
BlackRock Inc., said. “A lot of times they take a stock-centric approach, and we want to see if there should be tweaks for ETFs.”
If an event affects a stock price, consideration of trading halts or other actions should include the impact of ETF prices, Mr. Archard said. Twenty-five of BlackRock's iShares ETFs saw their prices briefly fall 60% or more during the trading on May 6.
Some ETF providers are encouraging regulators to look at how the funds are regulated in Europe. At a number of exchanges in Europe, collars restrict how much an ETF can trade away from its net asset value, said Benjamin T. Fulton, head of global ETF business at InvescoPowerShares Capital Management LLC. “They do not separate rules for stocks and rules for ETFs,” Mr. Fulton said. “But they may need to look at that.”
It makes sense for ETF providers to want to get ahead of any regulation since new rules could have drastic implications for the industry, said Adam Sussman, director of research at TABB Group, a financial markets research and advisory firm. “What regulators do in terms of instituting new rules on the exchanges and trading activity could impact the way ETF market makers operate and the way liquidity is formed in ETFs.”
