ETF providers consider curbing market orders

A prohibition on market orders for exchange-traded funds would help prevent another “flash crash,” ETF providers told attendees at an industry gathering in New York this morning. “I am not quite at the point where I would say that market orders [for ETFs] should be abolished, but I am pretty close,” Jim Ross, senior managing director at State Street Global Advisors said during a panel discussion about the ETF industry hosted by The Charles Schwab Corp. During the May 6 flash crash, the Dow Jones Industrial Average dropped 1,000 points — with hundreds of stocks briefly trading at close to zero — before rebounding within minutes. More than two-thirds of the trades canceled that day involved ETFs, causing regulators to investigate the industry's role in the event. Many ETF providers believe that part of the problem stemmed from financial advisers' reliance on automated market orders, which are orders to buy or sell a security at the prevailing market price. The use of limit orders, which specify the price at which investors want to buy or sell, could have prevented many ETF trades from being executed at the wildly divergent prices that resulted from the volatility of May 6, experts said. “Up until May 6, I used market orders — they are simple and easy to do,” Mr. Ross said. At a minimum, it might be a good idea for regulators to issue a six-month moratorium on ETF market orders to figure out what can be done, said Benjamin T. Fulton, head of the global ETF business at Invesco PowerShares Capital Management LLC. “If they were to say in the next six months, ‘let's take these trades out and see,' I wouldn't be opposed to that,” Mr. Fulton said in an interview. According to a survey released yesterday by BlackRock Inc., most of the advisers who responded are not keen on changing order rules. Of the 380 advisers surveyed, 63% said that the flash crash did little to change their use of stop-loss orders and more than one-third strongly oppose a prohibition on such orders, which indicate the price at which a security should be sold to limit further losses. Seventy-seven percent said that their usage of ETF market orders will remain the same. “It would be a huge jolt to investor confidence to prohibit market orders for ETFs,” Tom Lydon, a registered investment adviser and president of Global Trends Investments, said in an interview. “Imagine if all of a sudden investors couldn't make market orders with ETFs, but they could with individual securities. They would ask, ‘What does that say about ETFs?'” Mr. Lydon said. A preliminary report on the factors that caused the flash crash is under consideration by the Securities and Exchange Commission and the Commodity Futures Trading Commission. “The staffs are reviewing the information to determine the next step,” said an SEC official, who asked not to be identified.