Apologies for the late reply. Not sure how to answer, so bear with me...
"I thought they found a strong link to some structural deficiencies in the way the markets deal with (or don't deal with) high volumes of ETF trades. Weren't 70% (or there 'bouts) of the most volatile trades in ETF's?"
Answer: "High frequency trading is attributed with generating over 70% of the volume of trades on our equity markets. Similar statistics are not available for forex markets, but speculating disguised as commercially necessary trades have been reported to be over two-thirds of the volume. Liquidity and pricing transparency are the benefits offered by its advocates, but regulators and other market participants who disagree with this positive assessment are presently discounting these benefits."
epchan.blogspot.com
"So, let’s do some quick math, $800 billion x 0.52% = $4.16 billion. This is a huge market and ETF providers need the HFT market makers so that they can keep pumping out more ETF’s. Without HFT “liquidity”, the ETF market would probably not have seen its dramatic increase in size. But we ask, at what cost does this liquidity come? Are unsuspecting ETF investors actually the ones that have been unknowingly funding the HFT industry? Please also remember that two thirds of the Flash Crash Disaster erroneous trade names were ETF’s; there alone is the HFT smoking gun and footprint."
blog.themistrading.com
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Theoretically, there shouldn't be a causal link between ETFs and HFT failures. Actually, there is. The public, believing ETFs are designed to track the underlying, hasn't been informed of concurrent realities:
"I'm not saying they don't work, I understand that stat arb firms are exactly what makes ETFs more efficient. The point is that as the case of the UNG/USO show... it presents a situation where flows are attracted into them not due to the prospects of the underlying asset, but whether they are likley to be a good play for stat arb firms. And in the case of the USO and UNG their growth in smaller markets then risks taking over and influences the market itself. All that time, retail investors think they're getting a simple product that tracks the underlying. My "con" reference is that ETF development was just as much about attracting institutional flows as retail flows ... but they're made out to be retail products mostly.
ftalphaville.ft.com
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There are other ETF risks, such as rollover in commodities. Any knowledgeable investor knows that commodity ETF performance can be a disaster:
The point: ETFs were sold to the public as one thing, while they represent something else - a profit generating mechanism - to HFT market players.
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We've spoken of systemic risk and HFT upstream; the recent flash crash was a perfect example.
In evaluating recent regulatory "reforms" most commentators gave poor marks to the outcome:
Wall Street Reform: Politicians Lie, Media Applauds, America Suffers
ritholtz.com
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Among many reputable others Benoit Mandelbrot has consistently warned of the dangers in current forms of modeling and trading. HFT compounds these risks.
Beyond HFT are other systemic risks that the financial sector assures us they can control: derivatives, leveraging, TBTF, etc.
"A systemic risk is the risk of a phase transition from one equilibrium to another, much less optimal equilibrium, characterized by multiple self-reinforcing feedback mechanisms making it difficult to reverse."
macroblog.typepad.com
Cascades. Dominoes. No wonder people are fleeing markets.
Jim |
