ETFs blamed for excessive volatility

Without volatility, the stock market would be a pretty boring place, which might be fine with some of your clients these days, even if their long-term returns would suffer.

The causes of the extreme volatility that has whipsawed the market since July are not well understood. Sure, there is the unfolding Greek drama, occasional bad news out of the U.S. and OPEC speculation that oil demand will fall off a cliff.

But very often, there is no real news to generate sudden rallies or routs, which are frequently occurring just minutes before the closing bell.

Much attention has been paid to high frequency trading (HFT) algorithms, and many jurisdictions are looking into tighter controls on HFT. But scrutiny has also turned to leveraged ETFs—could these, too, come into the regulators’ crosshairs?

Not everyone is convinced that leveraged ETFs are the culprits, though. East Tennessee State University professor William J. Trainor Jr. looked into the causes of the “flash crash” of May 2010, and found ETFs were not to blame.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.