August Volatility Draws SEC Scrutiny on ETFs


The U.S. Securities and Exchange Commission is deepening a review of exchange-traded fund trading in the wake of August 24 market volatility, according to senior regulatory officials.

“The equity markets opened sharply lower in the morning of August 24th, following period of declining prices in the U.S. and non-U.S. markets,” SEC Chair Mary Jo White told the Investor Advisory Committee. “As a result of the rapid decline, a primary volatility moderator— the limit-up/limit-down mechanism— triggered trading pauses in a number of securities, many of which were exchange-traded products. In addition, to the trading pauses, it appears that some ETPs traded at sharp discounts to their net-asset values.”

One estimate citied by SEC Commissioner Luis Aguilar, who also spoke before the IAC, had the market-wide circuit breaker halting ETF trading more than a 1,000 times that morning. “This accounted for approximately 85% of all trade halts that day.”

The SEC’s Division of Economic and Risk Analysis as well as the Division of Trading and Markets will continue to evaluate the trading data from Aug. 24 to find whether the behavior of ETPs can be explained by uncertainty in pricing of the underlying assets, the nature of liquidity demand and supply for ETPs, and/or the low trading volume in individual ETPs, Chair White said.

Commissioner Aguila added that the Commission should also investigate whether ETF trading should be halted when a significant number of their portfolio assets are subject to a trading halt;  if uncertainty about when trades will be broken inhibit the efficient pricing of ETFs; and whether  market-wide circuit breakers should be recalibrated to help markets better deal with broad-based events.

The limit-up/limit-down mechanism is currently operation on a pilot basis, noted Chair White. “This pilot period is designed to provoke the Commission with sufficient data to evaluated how the plan operates in a variety of market conditions,” she explained. “The self-regulatory organizations and Commission staff are studying its operation, including how it operated on August 24. This analysis will inform the Commission’s evaluation on the plan and any necessary amendments to its operation before considering it for approval on a permanent basis.”

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