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ETF Trades Canceled; 'Flash Crash' Memories Return

Nasdaq OMX and NYSE canceled trades in 10 exchange-traded funds after their prices plummeted in early trading on Thursday, raising questions about measures implemented to safeguard investors against sharp market swings after last year’s “flash crash”.

NASDAQ
NASDAQ

The exchanges canceled certain trades that occurred in 10 of 15 Focus Morningstar ETFs that launched on Wednesday, said a spokesperson for Scottrade Financial Services, the ETFs’ sponsor.

The trades occurred early in the session when prices dropped by as much as 98 percent after a human processing error at Knight Capital Americas, a market maker for the ETFs.

The net asset values of the ETFs and the value of the underlying securities and shareholders were not affected, Scottrade said.

On its website, Nasdaq said it cancelled trades in FocusShares ETFs that were executed between 9:54 am and 9:56 am that were more than 10 percent away from the day’s trade before the erroneous order or the previous close if no trades occurred prior.

Nasdaq and NYSE declined to comment.

After the flash crash in May of 2010, when US equity markets plummeted in a matter of minutes, exchanges agreed to implement trading curbs for stocks and ETFs designed to prevent sudden and sharp changes in the price of securities. The Focus ETFs were not included because they launched after these initial measures were rolled out.

ETFs experienced some of the greatest falls in price during the flash crash. ETFs account for about 30 percent of trading volumes on US exchanges on any given day but they made up about 60 percent of the “broken” trades that were subsequently cancelled on May 6.

A report by the Securities and Exchange Commission and the US Commodities Futures Trading Commission after the flash crash identified an unusually large sell order sent into a market already skittish amid worries about the Greek debt crisis. That caused some liquidity providers to withdraw from the market and prices to swing wildly.

ETFs are investment funds whose shares trade on an exchange like a stock. They hold baskets of assets that typically track a market index. The Focus ETFs are based on stock indices published by Morningstar, the research group.

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