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BlackRock’s global ETF experienced a flash crash on Deutsche Boerse last month. How did this happen on one of Europe’s most liquid ETFs and can it be avoided in the future?
Following the US jobs data report, the $72.8 billion iShares Core MSCI World UCITS ETF (EUNL), Europe’s second-largest ETF, fell 5% in less than a second at 2.30pm Central European Time on April 5, before jumping back up shortly after as market-making activity resumed.
While not unprecedented – and not solely a quirk of ETFs but also other listed securities – the event highlights several key nuances in ETF trading that investors must understand.
BlackRock ETF Flash Crash Explained
Following the report of the US jobs data, sell orders were instantly placed on the ETF at a point when market-making activity was low, causing its price to decline.
This decline triggered multi-stop loss orders – a pre-placed sell order implemented by traders to limit losses on a security – causing the ETF’s price to spiral further as more and more stop loss orders were executed.
Crucially, none of these orders were big enough to trigger one of Deutsche Boerse’s safeguard mechanisms, which would have halted trading had EUNL’s price fallen 1.5%.
However, the spiral of stop-loss orders eventually triggered a separate safeguard mechanism, and trading was halted after EUNL’s price fell 5% below its overnight trading level.
Remarkably, due to the wonders of electronic trading, all of this happened in less than a second. At this point, market makers were brought back into the market to start trading on the ETF, with normal pricing resumed.
According to Paolo Giulianini, head of ETFs at Vantage Capital Markets, EUNL’s liquidity makes it more suitable for order-driven trades, meaning it can trade in a similar way to the futures and equities.
“We are talking about one of the most liquid ETFs in Europe and so it is more prone to being an order-driven ETF, not a quote-driven ETF,” he said. “If it was quote driven, you could say add more market makers, but because it is so liquid, there are likely many stop orders on this ETF which caused the price decline.”
Where Were the Market Makers?
While market makers are required to provide pricing for most of the trading day, there are often points – such as market opening or following news events – where this does not happen, or spreads are significantly wider, even on one of Europe’s most traded ETFs.
One argument is that market makers do not provide pricing during these periods of volatility as they are unlikely to profit from an arbitrage opportunity.