Aug. 24, 2015 Flash Crash Part Of Wall St. History
August 24, 2015: It's a date that has earned its place in “notable days on Wall Street.” Nearly a year ago today, the S&P 500 dropped as much as 5.3%, capping off a weeklong rout that roiled markets around the world.
While not as devastating as something like Black Monday in 1987―when U.S. stocks dropped 20% in a single session―or when markets reopened after 9/11 on Sept. 17, 2001―the events last Aug. 24 were enough to etch that date into the history books.
Fueled by China-related economic fears, the drop in the stock market that day ended a period in which the market was uncharacteristically tranquil. Up until that point, the S&P 500 hadn't seen a correction (unofficially considered a sell-off of 10% or more) in about four years. That was the third-longest such streak in history.
Panic Attack
The drop on Aug. 24 quickly put an end to that, while pushing investors from a state of complacency to panic in one fell swoop.
Chart courtesy of StockCharts.com
In the ETF world, the panic was especially palpable. Dozens of exchange-traded funds briefly traded well below the value of their underlying assets that day, fueling criticism that regulators and the industry weren't doing enough to protect investors.
Today, nearly a year after the Aug. 24 plunge, investors can now take a step back and look at the bigger picture. What, if anything, has changed since that tumultuous day―both on a macro level and in terms of the ETF industry?
China Still A Wild Card
The correction of August 2015 was the first of two major stock market sell-offs that were spurred on by events in China (the other was this past January: Investors Flood Safe Haven ETFs).
At the time, the prevailing narrative was that China's economy was in a free fall, and that a 1997-style Asian financial crisis was imminent. A year later, it's clear that those fears were unfounded. There has yet to be any financial or economic shock in China, and the country is seldom mentioned in the top financial headlines today.
But while a crisis has yet to hit, there are many open questions regarding the state of China's economy. The Chinese government took a number of measures―including banning short-selling in the country's stock market, halting the trading of more than 1,000 stocks and cutting interest rates six times in a year―to stabilize the situation.
Doubtable Data
Yet even with those measures, China's economy continues to slow, and perhaps more dramatically than the official figures indicate. Many analysts question the veracity of the economic data that comes out of the country, which is troubling for investors.
Hedge fund managers Kyle Bass, Paul Singer and others believe that it's only a matter of time before China faces a severe downturn that will be worse than the U.S. financial crisis. Others envision a rosier "soft landing" scenario for the world's second-largest economy.
In any case, the outlook for China is no clearer today than it was a year ago, despite the recovery in global stock markets.
ETFs Had A Bad Day
Meanwhile, the other big story from Aug. 24, 2015—the "mini flash crash" in ETFs—didn't do much, if anything, to derail the exchange-traded fund industry. U.S.-listed ETF assets are at record highs—above $2.4 trillion—and the investment vehicle continues to flourish at the expense of mutual funds.
Nevertheless, there is a bit of trepidation that another flash crash could hit ETFs again down the line. On Aug. 24, 2015, many ETFs―including those with billions of dollars in assets such as the Guggenheim S&P 500 Equal Weight ETF (RSP) and the iShares Select Dividend ETF (DVY)―fell significantly below their net asset values during the first hour of trading.
Dave Nadig, director of ETFs for FactSet, wrote shortly after the event that a combination of "market makers stepping away" and high-frequency trading may have contributed to the unusual price action that day.
Has anything been done to prevent this situation from unfolding again in the future?
According to Nadig, change may be coming, but probably not from regulators.
Regulatory Gridlock Persists
"In terms of actual regulatory change, not much has changed since August 24th last year," he told ETF.com. "Senate recalcitrance means the SEC is operating two commissioners down (5 of 7) and the CFTC is effectively stalled from doing any meaningful work (down to 3 of 5)," he said.
Instead, it looks like change may be coming from exchanges, according to Nadig: "Several folks signed a letter to the SEC (myself included) asking for some common sense reforms on how markets open, halt and re-open, and the exchanges have taken it a step further."
"Material improvements to the opening process after halts have already been implemented," said Bryan Harkins, EVP and head of U.S. Markets for Bats Global Markets, the largest exchange for ETF trading by market volume, and owner of ETF.com.
"In addition, exchanges have individually, and collectively, made a number of changes around the start of the day—including revising the limit up limit down (LULD) reference price—to ensure a smoother open. As a result, we’ve seen a marked reduction in the number of LULD pauses,” he added.
While it's impossible to rule out another flash crash and extreme price volatility, Harkins says the U.S. market structure is "materially stronger" as a result of the changes made in the past year.
(For more, read: Exchanges Propose New Unified Trading Rules)
Contact Sumit Roy at sroy@etf.com.
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