A panel discussion at this year’s Inside ETFs conference, held in Florida on February 7/8, threw some light on the subject.
That ETFs proved particularly vulnerable to severe losses during the flash crash became clear very soon after the event. The difference between the scale of the losses in US-listed stocks and ETFs was illustrated graphically by the panel’s moderator, Phil Mackintosh, managing director of equities trading at Credit Suisse in New York.
Intraday Losses In Stocks and ETFs on May 6, 2010
The two charts show the maximum intraday loss recorded by the stocks in the S&P 500 (the red dots) and by US-listed ETFs (the blue dots) on May 6. A relatively small percentage of US stocks fell in price that day by more than 20%, and only a handful recorded an intraday drop of more than 60%, the cutting-off point after which US regulators ordered trades to be cancelled. Yet many more ETFs than stocks suffered large-scale intraday losses, as is illustrated by the greater dispersion and downward skew of the blue dots when compared to those in red.
A timeline of trades in one of the ETFs that suffered a fall in price to near-zero on May 6 shows how the fund went from a price of nearly US$30 a share to one cent in less than a second.
At 2.45 pm exactly on May 10 the Rydex S&P Equal Weight ETF (NYSE Arca: RSP) was trading at around $39 per share, down for the day by a modest amount. Within 36 seconds the fund had lost another ten dollars, at which point its price imploded in successive trades within the blink of an eye. RSP recorded successive trades at $29.62, $28.12, $27, $26.02, $25.62, $24.5, before plummeting to $0.15, losing 99.5% of its value before the New York Stock Exchange’s second counter had ticked forward even one notch.
Trades recorded at 2.45pm, 36 seconds, May 6 2010 in the Rydex S&P Equal Weighted ETF (columns show time, volume and price)
 
The fund’s price then bounced around manically, switching from near-zero to $20 or $30 in price and then back again. Later on, RSP’s price recovered to end the day with only a modest decline. But investors with stop-loss or market sell orders that were transacted at prices less than a cancellation threshold later imposed by US regulators (60% away from the last price recorded before 2.40pm) had to fulfil their bargains. That, in turn, meant large and permanent losses for those affected.
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