Exchange traded products targeted by SEC after August volatility

Volatility hit US equities on August 24th 2015 after news of China's economic slowdown spread around the globe. Large stocks falling by more than 20 per cent put fissures between the net asset values of exchange traded products (EPTs) and their securities, causing widespread concern about the integrity of the globe's biggest equity market.

A document has now been released by the Securities and Exchange Commission (SEC) to help explain how equity markets navigate tumultuous trading waters. While no causes of August's instability were given, the analysis could help the forming of future policy for strengthening the structure of the market. 

According to the report, ETPs were hit harder than the stocks of separate firms, although ETP trading varied a great deal. There were instances of similar ETPs having opposed price movements in early trading. Sharp share falls of over 10 per cent were experienced by more than half of the 41 largest firms in the US on that day in August.

The time served as a reminder of financial markets' fundamentally unstable nature which has been disguised since the financial crisis by the scaffolding of central bank report. The Federal Reserve has now started to lift interest rates to offset an anticipated increase in the volatility of stocks and bonds, prompting a new resolve in the industry to shore up the market's integrity. 

BlackRock is just one of the large providers of ETPs to be advocating a re-think of how market risk is managed following last August's disruption. The New York Stock Exchange, which came under fire in the summer, has tightened its systems and procedures, while the primary exchange for most ETPs, NYSE Arca, has imposed narrow 'price collars'.