Suggestions to Safeguard Trading in the $2 Trillion ETF Industry

On most days, hundreds of millions of shares of exchange traded funds (ETFs) are traded with remarkable efficiency at a very low cost. The normally smooth functioning ETF market allows investors to easily get access to a wide range of investment portfolios at a very low cost. However, for about an hour on August 24th, 2015, circuit breakers interfered with regular ETF trading, and during that time some ETF’s traded at prices far from their fair value.

In an effort to help improve markets and ensure ETF prices do not get dislocated in the future, MMI wrote a letter to the U.S. Securities and Exchange Commission. In it, we suggested measures to protect investors and help professional intermediaries maintain orderly markets in Exchange Traded Funds (ETFs) during times of severe market volatility.

We proposed three practical solutions:

An optional “retail circuit breaker” that would protect investors from ETF prices that were a long way from their NAV.

Requiring exchanges to make clear when they would “break” a trade in an ETF.

Easing restrictions that would make it easier to hedge long ETF positions.