ETP market resilience should be examined in wake of Covid-19 upheaval, SEC told
Stressing the importance of ETPs, the report pointed out they account for roughly a third of overall US equity trading volume.
The Securities and Exchange Commission should look at ways to make the Exchange Traded Products markets more resilient to volatility and uncertainty, an ETP panel is telling the SEC’s Asset Management Advisory Committee in a preliminary report.
The Committee is expected to approve the report when it meets Wednesday.
ETP volatility in March triggered market-wide circuit breakers for stocks several times and caused spreads to widen and liquidity to worsen across markets, according to the study.
The start of the pandemic in the first quarter presented the strongest test for the resilience of the asset class since the 2008 global financial crisis, the authors asserted.
They wrote the height of volatility was so disconcerting that volume migrated away from electronic trading platforms as market participants expressed a preference to transact by phone.
“Although ETPs generally performed as designed during this volatility, the market conditions associated with the onset of the COVID-19 pandemic provide an opportunity to assess whether aspects of the ETP ecosystem could be improved,” the panel said in its report.
The authors recommended that FINRA look at ways to improve the fairness, orderliness, and efficiency of ETP markets as well.
Stressing the importance of ETPs, the report pointed out they account for roughly a third of overall US equity trading volume and even in the worst of the upheaval, they fulfilled their critical role of enabling investors to diversify across broad portfolios of securities in a cost efficient manner and acted as “shock absorbers” and price discovery vehicles for less liquid asset classes.
The study put the value of the 2,370 ETPs in the nation at $4.3 trillion as of June 30.
The authors called upon the SEC to hold a roundtable to assess whether market-wide circuit breakers or other aspects of equity market structure should be optimized to reduce the potential for market disruption during periods of extraordinary market volatility.
In addition, they said the regulator should consider whether investors would benefit from an ETP classification system that provides information about the structures and risks of ETPs at the point of order entry.
More broadly, the authors urged the Commission to conduct a thorough review of fixed income market structures to seek changes that could enhance transparency, liquidity, and price discovery.
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