- Gone in 60 seconds: ETF holders lost $20M at Investment News (free registration required)
- Recommendations Regarding Regulatory Responses to the Market Events of May 6, 2010 at CFTC.gov (PDF)
- Testimony Concerning the Severe Market Disruption on May 6, 2010 at SEC.gov (PDF)
We’re still on the hunt for the causes of the May 6, 2010 flash crash (Flash Crash Follies). The more we dig the more we realized that such a crash on a greater scale with more lasting and far reaching negative consequences will be felt as the universe of ETFs grows.
To arrive at our conclusion, along with all the other articles we’ve submitted on the topic, we’ve pulled the earliest reference to a “flash crash” in the article titled, “Gone in 60 seconds: ETF holders lost $20M; Pricing glitch produces big winners, big losers.” Of course, at the time, December 17, 2004, it was called a “pricing glitch” and not a flash crash. However, all of the features exhibited in that crash of the Nasdaq 100 Index Tracking Stock (QQQ), now known as an ETF, was very much a characteristic of what happen on May 6, 2010.
One quote that we especially enjoyed from the January 24, 2005 article was the quote by Nasdaq vice-president Chris Concannon who said:
"In the early QQQ trading, there were very few liquidity providers facilitating trading. That obviously changed immediately, and we will never see something like this happen again.''
Apparently, never has come much sooner than previously thought.
The solution to the problem of future flash crashes is to do away with all ETF and derivative related products for retail investors. However, we understand the blithe nature of such a proposition. To remedy this thought and to facility the investor’s desire to take advantage of future price discrepancies (speculate), we have thought openly of placing limit orders to buy 30% to 50% below the prevailing price of the Nasdaq 100 ETF or other ETFs that we’d like to own if the price was right.
Our use of limit orders to buy would be with the understanding that if the desired price target isn’t hit then our request would not be filled. Unless you have a marginable account, you’d have to be very clear that cash has been set aside for the quantity and approximate price that you’d make your purchase. Additionally, our discussion of the use of automated orders and ETFs stand in apparent contradiction to our writings on the respective topics (article on automated order here) (articles on ETFs here).
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