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On Monday, Aug. 24, global stock markets were in panic-mode. The selloff began in China, infected other Asian markets, then Europe. Of course the selling spilled over to Wall Street right from the opening bell, with the Dow Jones Industrial Average plunging over a thousand points lower in the first 10 minutes of trading.
For retail investors, the pain of the panic selling was magnified by a near breakdown in trading for many Exchange Traded Funds (ETFs). Huge price swings of 30% or more in just a few minutes, and widespread trading halts for many ETFs, resulted in buy and sell orders getting filled at huge discounts to the actual market prices of the underlying stocks.
For example, the Vanguard Health Care ETF (VHT) plunged 32% in the first 20 minutes of trading, falling as low at $91.31. Then just as quickly, VHT rebounded over the next 30 minutes to $138.78.
Any investors unlucky enough to enter a sell order at the open, or with a stop-loss order already in place, got scalped for nearly $50 a share in VHT!
The irony is that all this happened in spite of “safeguards” put in place after the May 2010 flash crash. Now the SEC is reviewing these measures, since they obviously failed to protect investors five years later.
In fact, circuit breakers designed to halt trading temporarily and smooth volatile price swings were triggered nearly 1,300 times on Aug. 24. BlackRock’s popular and very liquid iShares ETFs were halted more than 200 times.
But the 2015 mini flash-crash apparently hasn’t dented the popularity of ETFs. After investors yanked $6.3 billion out of ETFs during the month of August, money is now flowing back into ETFs. According to Merrill Lynch research, after three straight weeks of equity outflows, investors were buyers to the tune of $10.7 billion last week, with $7.2 billion of that flowing into the SPDR S&P 500 ETF (SPY).
Meanwhile, the biggest losers from ETF outflows recently have been emerging markets. Investors withdrew $3.8 billion in assets from the two largest: Vanguard Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets (EEM) over the past 30 days alone.
The lesson here for investors is to take care when placing market orders to buy or sell. Even hard-and-fast limit and stop-loss orders can trip you up in today’s volatile markets. A better alternative is to keep a “mental” stop-loss level in mind, but only enter the trade at the close, not the open, if the underlying security clearly falls below this level.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 2 comments }
…another crystal clear indicator that the stock market is obviously rigged in favor of HFT.
Thanks very much for your insights Mike, which are greatly appreciated.
There is no rigging in these markets. You are dealing with a severe lack of liquidity in the markets, which drives these major swings. Part of a normal market cycle. Happens every 89ish years. Look it up and check out the craziness of those bear markets. Looks just like todays markets.