Disappearance of a Stock Operator!
August 25, 2015
Where did the market makers go?
The NYSE invoked an extreme volatility rule this morning that effectively allowed designated market makers to step away from indicating levels in pre-market. Not only were price indications not provided before the opening bell, it seemed the DMMs that trade in stocks and ETFs were quite obviously absent in the first 30 minutes of trading.
Without these operators providing liquidity, markets did not function normally.
ETFs from companies such as iShares, Vanguard, Wisdomtree and other more niche providers appeared to stop making markets in their ETFs. With the broad markets down ~6%, many ETFs traded down as much as 30%, creating a massive gap between the trading price and the intraday net asset value.
This is particularly harmful to less sophisticated investors and traders who may have used market orders to buy and sell their ETFs amidst this volatility.
The day’s range on my selection of non-core ETFs, tell the story of just how much volatility there was in the dearth of liquidity. Had one been lucky enough (or dare I say skillful enough) to purchase the ETFs below, at their low of the day, and sell at the peak, they could have reaped some very strong gains.
The trough to peak returns are even more startling when comparing to the daily change.
|IAI:US||Ishares Dow Jones US Broker-Dealers Index Fund||ARCA||38.6%||-3.94%|
|IAK:US||Ishares Dow jones US Insurance Index Fund||ARCA||71.6%||-4.26%|
|HACK:US||FactorShares Trust PureFunds ISE Cyber Sec ETF||ARCA||46.6%||-3.90%|
|DXKW:US||WisdomTree Korea Hedged Equity Fund||NSD||29.6%||-2.28%|
Now one could say that I cherry-picked a few thinly traded ETFs to prove my point (HACK traded $85mm of volume,) but a number of other individual equities, and those that are well-covered, also overreacted this morning either due to emotion, or perhaps a lack of market making.
|JPM:US||JP Morgan Chase||25.66%||-5.27%|
|KKR:US||KKR & Co LP (DE)||142.88%||-4.40%|
|CVS:US||CVS Health Corp||28.07%||-1.96%|
|GILD:US||Gilead Sciences Inc.||24.03%||-4.44%|
The largest company in the World by market cap swung over 18% or $95 billion in dollar value today.
While there is always very little volume at these extremes, I can’t help but believe that the extreme volatility this morning was exacerbated by the invocation of Rule 48 and the apparent absence of market makers at 9:30am.