Market Overview

Knight Capital Glitch May Have Impacted Some ETFs

Knight Capital Glitch May Have Impacted Some ETFs

Wall Street is abuzz today about technology issues at execution firm Knight Capital (NYSE: KCR) that impacted trading in roughly 140 New York Stock Exchange-listed equities.

The affected stocks include Dow components Alcoa (NYSE: AA), Caterpillar (NYSE: CAT) and Verizon (NYSE: VZ), among other marquee issues and the technology glitches are believed to have forced Knight to tell clients to route their trades to rival execution shops.

Exchange traded funds, often criticized by naysayers as one cause of the 2010 flash crash, were also affected by the Knight Capital imbroglio.

"This morning, we watched volumes explode in a number of stocks and ETFs," said Chris Hempstead, head of institutional sales and trading at WallachBeth Capital. New York-based WallachBeth is one of the largest ETF execution firms in the U.S.

In an interview with Benzinga, Hempstead highlighted several examples of ETFs that saw unusually large volume. One prominent example is the Vanguard Utilities ETF (NYSE: VPU). VPU's volume for Wednesday was close to 6.6 million shares, significantly higher than three-month daily average of less than 73,400 shares.

Hempstead said the abnormal activity in VPU prompted his team to look at the Utilities Select SPDR (NYSE: XLU), the largest utilities ETF. With about an hour left in the trading day, XLU's volume has already surpassed double the daily average.

"We flagged enormous flow into VPU," Hempstead said. "As such we immediately looked to XLU for carry over flow. Indeed XLU was trading at abnormally high volume levels during the early part of today's session."

There was also significant activity in the Market Vectors Gold Miners ETF (NYSE: GDX), the largest ETF tracking companies that extract the yellow metal from the earth. Hempstead said the action in GDX might be the result of a massive surge in volume in the Direxion Daily Gold Miners Bull 3X Shares (NYSE: NUGT). NUGT's volume has eclipsed five times its daily average.

The issues experience by Knight Capital today underscore the notion that as technology plays an ever-growing role in the capital markets, situations like this will occur from time-to-time. These situations also shine a light on what execution firms are doing to take preventative action to the degree such action is possible.

"As a general rule of thumb, and a prudent one at that, we like to have multiple checks and balances built into our internal trading platform in order to prevent these unfortunate situations," Hempstead said.

WallachBeth aggregates pricing from the a broad range of liquidity providers, ensuring the company is never dependent on any one single proprietary trading firm.

"Nobody likes to hear or read about any Industry peer that experiences operational problems, particularly when it impacts investors seeking access to the trading marketplace.  Without knowing the particulars of the incident that captured industry news headlines this morning, this latest event serves as catalyst for those who debate the definition of best execution and the wisdom of relying on a single source when executing order," Hempstead said.

Posted-In: News Sector ETFs Broad U.S. Equity ETFs Specialty ETFs New ETFs Emerging Market ETFs Currency ETFs Events Best of Benzinga


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