The original flash crash shows liquidity fears are nothing new

Business Insider | 5/28/1962 | Ben Carlson, A Wealth of Common Sense
smnth28 (Posted by) Level 3
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Investors are increasingly worried about liquidity mismatches.

But concerns about ETF liquidity are nothing new.

ETF - Part - US - Equity - Market

ETF's make up a small part of the US equity market — about 6%.

In his latest memo, Oaktree Capital's Howard Marks opined about ETFs and their liquidity profile:

Fund - Price - Stocks - Bonds - Day

If you withdraw from a mutual fund, you'll get the price at which the underlying stocks or bonds closed that day, the net asset value or NAV. But the price you get when you sell an ETF — like any security on an exchange — will only be what a buyer is willing to pay for it, and I suspect that in chaos, that price could be less than the NAV of the underlying securities. Mechanisms are in place that their designers say should prevent the ETF price from materially diverging from the underlying NAV. But we won't know if "should" is the same as "will" until the mechanisms are tested in a serious market break.

Worries about ETF liquidity are nothing new. Investors and pundits alike have been discussing the ramifications of this new-ish fund structure for years now.

ETFs - Index - Funds - Role - Rise

Some assume ETFs and index funds have played an integral role in the rise of stocks since 2009. These people also assume that investors in these funds will get destroyed during the next downturn but the worry is that the carnage could be even worse in ETFs because they trade throughout the day (whereas mutual funds only offer one closing price to transact).

I get the idea that there could be trouble caused by a liquidy mismatch in long-term assets during a short-term panic. But these worries are nothing new. Investors have long been making short-term decisions with long-term capital at stake.

Flash - Crash - May - Stocks - %

The flash crash in May of 2010 that saw stocks fall close to 10% within minutes along with the more recent one...
(Excerpt) Read more at: Business Insider
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