Saturday, October 13, 2018

The fall in the us exchanges accelerated in the last minutes of trading. Why?

The fall in the us exchanges accelerated in the last minutes of trading. Why?

The fall in the us exchanges accelerated in the last minutes of trading. Why?

Us stock indices sharply accelerated the decline before the closing of trading. This was due to passive investment funds. They began to sell shares before the closing of the exchange.

Journalists Wall Street Journal (WSJ) drew attention to the anomaly in yesterday's trading on the new York stock exchange (NYSE). On Thursday evening, October 11, the sale of shares accelerated sharply in the last minutes before the closing of the trading session. S & P 500 for these five minutes fell from 2737,38 to 2728, 37.

The culprit was the index funds ETF, writes Wall Street Journal. We are talking about exchange-traded investment funds that copy the dynamics of a particular index. Their task is to minimize the so-called tracking error, that is, the difference between the ETF dynamics and the tracked index dynamics. The error occurs when the money deposited or withdrawn from the ETF is not quickly converted into shares.

To match the index, many ETFs try to perform operations before closing trades-at the very moment when the final value of the index is formed. As a result, since 2012, according to the WSJ, the volume of transactions before the closing of the trading session increased to 26% of the total volume of transactions.

How to manage investments

Operations of index funds to rebalance portfolios at the last moment can distort the actual results of the day, the article says. This is a continuation of the old discussion between the supporters of active and passive ways of investment management.

The active approach involves self-selection of stock for investment, while the passive shifts the responsibility for selection on the index of operators — that is, those who composes the bonds, blue chips and other stocks by industry, thereby influencing the ETF.

Proponents of active management, who have been steadily losing ground due to too high a Commission in recent years, argue that passive strategies are good as long as they are followed by a relatively small proportion of investors. When their share becomes dominant, following the indices begins to bring additional volatility and even distortions to the markets that do not correspond to the true intentions of investors and the market situation. This is what happened at the end of trading on Thursday, October 11.