Another Helmet to Helmet Hit on ETFs

In the National Football League this past weekend, a number of potentially paralyzing helmet to helmet hits occurred in games. The NFL has responded with over $150,000 in fines and the threat of suspensions, realizing this activity is bad for business. Similarly on Monday the ETF industry took a helmet to helmet hit on the NYSE Euronext’s electronic Arca platform as an issue with a software upgrade at the exchange caused a temporary plunge of almost 10% in the price of one of the largest traded ETFs and securities in the world. This problem occurred late in the day and was quickly corrected according to Bloomberg’s report on the story.

This latest incident contributes to the uncertainty introduced about the exchange traded nature of ETFs. This began in May of this year as a result of the Flash Crash. Recall that ETFs disproportionately suffered from the Flash Crash due to issues surrounding the lack of uniform circuit breakers. Now some advisors and investors are rightly feeling uneasy about ETFs after these two incidents. They are concerned the underlying problems have not been addressed and will likely occur again. After all, one advisor told me, who isn’t concerned about a core portfolio holding that drops almost 10% due to a software glitch?

Clearly exchanges, regulators and ETF sponsors must do more to dialogue and coordinate efforts in order to create fail safe procedures around the trading of ETFs. Perhaps now is the time for a visible and focused ETF advocacy group to emerge that would advise on and identify risks in the marketplace. There is too much at stake for the ETF industry, let alone investors, to not pour significant resources into avoiding these type of collisions all together.