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Regulators eye volatile trades in flash crash

Nancy Marshall-Genzer Aug 11, 2010
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Regulators eye volatile trades in flash crash

Nancy Marshall-Genzer Aug 11, 2010
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TEXT OF STORY

Bill Radke: Also in Washington, federal officials are trying again today to figure out what caused the flash crash. This was the big stock drop last May, when the Dow plunged almost 700 points in just minutes and then quickly rebounded. Regulators are meeting today to ask whether they should blame something called exchange-traded funds. So Marketplace’s Nancy Marshall Genzer asks: What’s an exchange-traded fund?


Nancy Marshall Genzer: ETFs are traded like stocks. But they’re actually funds tied to different baskets of stocks. A government study found that 70 percent of the most volatile trades made during the flash crash were ETFs.

So, are they solely to blame? Matthew McCall says no. He’s president of the Penn Financial Group. McCall says ETFs may have played a role in the flash crash, though. They’re traded in seconds, following market swings closely.

Matthew McCall: So day traders love it, as day traders look for volatility. I mean, as a day trader you want volatility.

But ETFs can create a kind of herd effect. Things happen very fast, and traders can get spooked easily. Charles Rotblut is vice president of the American Association of Individual Investors. He says that’s what happened during the flash crash: Everybody stopped trading at once.

Charles Rotblut: A good analogy is that someone saw one person walking away from the party not sure why they were walking away from a party, but assuming there was something going on, they left.

Before you know it, the party’s over.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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