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"Computer Glitch" Plaguing ETFs Is "Unrelated" To Monday's Flash Crash, BNY Swears

Tyler Durden's picture




 

On Wednesday, we asked if Monday’s catastrophic ETF collapse which saw over 200 funds fall by at least 10% was just a warmup for a meltdown of even greater proportions. 

The problem, you’ll recall, was that in the midst of Monday’s flash-crashing mayhem, a number of ETFs traded at a remarkable discount to fair value. Essentially, market makers looked to have simply walked away (there’s your HFT "liquidity provision" in action) or else put in absurdly low bids in order to avoid getting steamrolled when the constituent stocks came off halt. The wide divergences weren’t arbed for whatever reason and the result was an epic breakdown of the ETF pricing mechanism. 

As we wrote on Wednesday, this was proof positive that contrary to popular belief (which, incidentally, is itself contrary to common sense in this case), an ETF cannot be more liquid than the assets it references and when liquidity dries up in the underlying as it did on Monday, the market structure is clearly inadequate to cope. 

But don’t worry, because the problem has been identified.

It’s simply a "computer glitch" at Bank of New York Mellon. Here’s WSJ:

A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

 

The problem, stemming from a breakdown early this week at Bank of New York MellonCorp., the largest fund custodian in the world by assets, prompted emergency meetings Wednesday across the industry, people familiar with the situation said. Directors and executives at some fund sponsors scrambled to manually sort out pricing data and address any legal ramifications of material mispricings, those in which stated asset values differed from the actual figures by 1% or more.

 

A swath of big money managers and funds was affected, ranging from U.S. money-market mutual funds run by Goldman Sachs Group Inc., exchange-traded funds offered by Guggenheim Partners LLC and mutual funds sold by Federated Investors. Fund-research firm Morningstar Inc. said 796 funds were missing their net asset values on Wednesday. 

Ok, got it. So basically, if you want to know what the NAV of your fund is, you’ve got to go stock-by-stock and calculate it the old fashioned way. And what, you might ask, does this mean for investors in these most liquid of all securities? 

The effects of the breakdown are threefold: It has made ETFs more costly to trade, hindered investors’ ability to trade accurately in and out of popular investment vehicles, and forced fund companies to scurry to price securities.

Here we see the hallmarks of liquidity: i) rising trading costs, ii) an acute inability to trade in and out of the market accurately, and iii) issuers that have no idea what’s going on. 

And how about HFTs, who, you’re reminded, insist that they provided liquidity during Monday’s chaos? 

Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.

 

"We measure our edge in terms of subpennies," one trader said. "We can’t afford to be off by a penny."

So if we had to venture a guess as to what might have happened here, it might go something like this: once the halts got started, it became impossible to calculate ETF NAV causing "liquidity providers" to widen out their bid- asks in order to protect themselves against NAV uncertainty, and that, in turn, caused anyone who had a market order in to hit the bid at absurdly low prices, taking out stops, and before you knew it, the rampant confusion simply caused Bank of New York Mellon's/ SunGard's platform to malfunction. 

Of course we'll never know what really happened, but what we can say is that if the following is true, it would be some damn coincidence:

The outage wasn’t related to the market turbulence Monday that included the largest-ever intraday point decline in the Dow Jones Industrial Average, the bank said. 

*  *  *

Incidentally, the official word is that the problem was caused by "an operation systems change performed on Saturday." Read the note below and decide for yourself.

SunGard BNY Mellon InvestOne External Statement_FINAL

 

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Thu, 08/27/2015 - 19:48 | 6479391 Cognitive Dissonance
Cognitive Dissonance's picture

To admit to anything other than a computer 'glitch' is to admit to the fallacy of the 'markets'. Never ever admit there is a con because to do so immediately raises the question......who is being conned?

<Does anyone really know what time it is. Does anyone really care?>

Thu, 08/27/2015 - 19:56 | 6479453 Lumberjack
Lumberjack's picture

Nanex knows exactly what time it is and I think a lot of folks care.

Thu, 08/27/2015 - 19:56 | 6479460 knukles
knukles's picture

So, who you guys all think were buying the ETF's at a discount to fair value?
Me too.  Ain't seen any GS or Morgue trades cancelled.
Hah!  Betcha betcha betcha betcha betcha

Thu, 08/27/2015 - 19:57 | 6479464 realmoney2015
realmoney2015's picture

Even if it was a computer glitch, does that make you feel more comfortable with all your hard-earned wealth tied up in these 1's and 0's? Of course not! Get out of the digital markets NOW!!!!

Thu, 08/27/2015 - 20:26 | 6479576 KnuckleDragger-X
KnuckleDragger-X's picture

Computers do exactly what they are told to do and it's not their fault if the buttons are pushed by crack smoking butt weasels. Garbage In, Garbage out, same as its always been.....

Thu, 08/27/2015 - 19:38 | 6479394 johngaltfla
johngaltfla's picture

Price decline of over 1000 = Flash crash

Price increase of over 300 = Happy Days are here again

But dont' worry, it's contained.

Thu, 08/27/2015 - 19:38 | 6479395 Luc X. Ifer
Luc X. Ifer's picture

Lots of suspect glitches this year and especially last few months and all ETF related.  

Thu, 08/27/2015 - 19:45 | 6479420 Crocodile
Crocodile's picture

I believe SunGard was telling the truth since they were likely using Microsoft products for the upgrades or changes.

Thu, 08/27/2015 - 20:29 | 6479445 Mr. Bones
Mr. Bones's picture

If I am to believe the conceit that the financial system is a national security asset, then why does it seem to be plagued with buffoon ITs who roll untested code on prod (July 8, 2015) and "glitches" that cause 1000 point drops (Monday)?

If this system is in-fact integral to our way of life, why aren't there well publicised firings when someone shits the bed in a way that impacts all of us muppet investors?

 

Odd, "all of us" should be strikethrough'd but it isn't.

Thu, 08/27/2015 - 19:55 | 6479457 Amish Hacker
Amish Hacker's picture

If the ZH analysis is correct, then another liquidity failure event is a certainty, and probably soon. How many times can they blame a "glitch" before even the muppets start asking questions?

Thu, 08/27/2015 - 20:16 | 6479522 Tsar Pointless
Tsar Pointless's picture

The only question the muppets have been trained to ask is "When will the Fed save our markets?"

That's why we call them muppets.

Thu, 08/27/2015 - 20:33 | 6479587 KnuckleDragger-X
KnuckleDragger-X's picture

Or when does the next dip start.....

Thu, 08/27/2015 - 20:07 | 6479488 Ralph Spoilsport
Ralph Spoilsport's picture

A production and a backup environment both "concurrently" got corrupted somehow. Sounds legit. 

/s

Thu, 08/27/2015 - 20:15 | 6479519 Budnacho
Budnacho's picture

I eagerly anticipate the TV broadcast after this all falls to shit and we will see Grandma up there saying something to the tune of "Nobody could have forseen the events that took place..." yadda yadda....

Thu, 08/27/2015 - 20:38 | 6479645 Ban KKiller
Ban KKiller's picture

Vision is poor due to having their faces up bankster asses. 

Thu, 08/27/2015 - 20:24 | 6479549 CHC
CHC's picture

Sure - it's always a glitch or something benign.  BULLSHIT!!!  When this shitstorm blows up, my one wish is to be watching CNBC and all those elitist bobbleheads running around the studio as if their fucking hair is on fire - screaming like a damn gaggle of raped apes not having a clue what the hell is happening.  That's my ONE true wish - to see that! 

Thu, 08/27/2015 - 20:30 | 6479600 xcehn
xcehn's picture

They will no doubt spin it as a fantastic buying opportunity, even as the walls crumble around them. Because the US economy is fundamentally sound, of course.

Thu, 08/27/2015 - 20:33 | 6479622 Ban KKiller
Ban KKiller's picture

I see flying pigs in your near future. 

Thu, 08/27/2015 - 20:32 | 6479617 Ban KKiller
Ban KKiller's picture

All I needed to know was Bank of New York, Mellon. 

"Distupted" = BONY stole billions.    

ON with the show! 

Thu, 08/27/2015 - 20:51 | 6479703 messy
messy's picture

planned glitch ... now HFT's can't be HFT's

 

Thu, 08/27/2015 - 22:00 | 6479930 kelley805
kelley805's picture

Here is a short story about how another Flash Crash is easy to have happen.  Enjoy!

 

http://michaelekelley.com/2012/05/25/flash-crash-epitaph-short-story/

 

Fri, 08/28/2015 - 03:01 | 6480425 ConfederateH
ConfederateH's picture

What a load of bullshit.  Who does an OS upgrade in production after a ~600 point drop on Friday and an entire week of extreme volatility?  How did data get corrupted in an OS upgrade?  The DB systems would not have been affected. 

It's 12:00, do you know the physical stocks in your ETF are?  If not, go ask the "glitch".

Hold only physical PM's, Federal reserve notes, and physical stock certificates. 

 

 

Fri, 08/28/2015 - 03:22 | 6480461 Debugas
Debugas's picture

when IT specialists get paid 350 times less than CEOs the result is obvious

Fri, 08/28/2015 - 03:58 | 6480496 Calculus99
Calculus99's picture

Weather (too hot/too cold) = catch all excuse

Computers (glitch/server blowouts, hell, make whatever reason you want, most people don't know howthey work) = catch all excuse

Fri, 08/28/2015 - 07:53 | 6480739 chilller
chilller's picture

I'm glad they got it fixed. There will be no doubt or excuses when the big one hits...

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