Coronavirus anxiety and a potential oil price war have contributed to increased volatility in the markets.
Investors should be mindful of trading best practices, particularly during times of heightened volatility.
Given significant pre-market volatility driven by coronavirus anxiety and the beginnings of a potential oil price war, there was considerable uncertainty as stock markets were set to open on Monday, March 9. Shortly after market open, we saw the triggering of Level 1 Market Wide Circuit Breakers (MWCB) for the first time since they took effect in 2013, resulting in a 15-minute trading halt across all National Market System (NMS) securities.
As a reminder, there are three MWCB levels that trigger trading halts at various thresholds and time durations:
As we experienced on March 9, there is typically heightened volume, as well as increased probability of volatility, at the open and close of each trading session as markets work to absorb new information at the open and settle trading imbalances at the close. For this reason, we recommend not trading market-on-open (MOO) or market-on-close (MOC).
It’s worth reviewing some additional thoughts on the best trading practices to guide investors in today’s market, as current volatility may persist. Our first strategy is simple. If you do not have to trade in volatile times, we recommend that you do not. If you choose to buy or sell ETFs, or any other securities, during periods of heightened volatility, we recommend that you place your trades using limit orders.
A limit order identifies the maximum and minimum prices at which you want to buy or sell a security. Unlike market orders that execute immediately at the next price, limit orders do not guarantee execution. They do, however, provide control over price level and allow investors to manage execution risk, which is particularly useful when volatility spikes.
Limit orders generally aren’t necessary, although are still encouraged, for very liquid ETFs—like the SPDR® S&P 500® ETF (SPY)—where there are millions of shares offered at each price point with very narrow bid/ask spreads.1 However, limit orders can be a useful execution tool in less actively traded securities and, again, can help to reduce adverse price impact in times of market stress.
Exchange traded funds are known for their tradability, yet 88% of all US-listed ETFs trade less than $25M per day, on average.2 It’s therefore critically important to evaluate an ETFs liquidity profile—in addition to the market environment in which you trade—prior to making execution decisions. Additionally, the way in which you trade may depend on the ETF’s liquidity profile and/or current market conditions. Here are some insights on how to optimize trade execution for ETFs of all levels of liquidity.
SSGA has a long-standing commitment to market quality in our ETFs and deep relationships within the trading community. As one of the industry’s largest ETF providers, we are committed to collaborating with the industry, including exchanges, issuers and other market participants to deliver a high level of service to ETF investors in all market environments. Our SPDR Capital Markets Group is in regular communication with market makers, exchanges and liquidity providers in an effort to monitor the liquidity of our products for the benefit of our clients and investors. Should you have any questions on ETF trading in general or during bouts of volatility, please contact us.
1Bloomberg Finance, L.P., as of March 11, 2020. 2Bloomberg Finance, L.P., as of January 31, 2020.
Investing involves risk including the risk of loss of principal. Past performance is no guarantee of future results.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The views expressed in this material are the views of SPDR Americas Research through the period ended March 9th, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured –No Bank Guarantee – May Lose Value
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.