Role of ETF in the Flash Crash

[Hardy Noman]

Hi David / Shakti (@David Harper, CFA, FRM, CIPM , ShaktiRathore)

Some empirical studies concluded that the volatility spillover from futures to equity markets during the flash crash was heavily caused by ETP's...
How can ETP blamed for this?
Even if ETP's (or ETF's) didn't exist the effect of future flash crash would certainly spread to equities.
i mean, arbitrageurs or other traders (who already have their algo trading softwares set to exploit these discrepancies) would have gone long S&P Futures (after the flash crash) and shorted Equities.

Which would reduce price of equity and increase price of S&P Futures...back to the equilibrium point...isn't it?

thank you!

 

[ShaktiRathore]

Hi(as per my understanding i am not sure on answer may be David may help )
As per i think ETFs are exchange traded funds so if you are long ETFs you also own some equity or a portfolio of equity in the index. So during a flash crash ETFs would certainly make the crash worse as ETFs are sold and that would cause the equity portfolio to be sold thereby causing a spillover to the equities markets. The impact of crash certainly amplifies with this ETFs during the crash because they also put downward pressure on equity markets as more equities are shorted.
If ETFs didn't exist the equities would certainly be affected w/o them , but the flash crash a sudden crash was certainly amplfified by ETFs beacuse not equties but portfolios of them were sold in one go and these algo softwares would sold ETFs but if they were not there equties would have crashed but not certainly in as big a crash as due to ETFs. certainly selling certain equities over time and a bunch of equity in one go(ETF) makes a difference.
thanks

 

[Hardy Noman]

Thank you...!