As if it wasn’t bad enough that this week’s equity markets rout made pricing exchange traded funds more difficult, a rumored computer systems problem is making matters worse.
According to several sources, one major bank is experiencing problems with its ETF pricing model and that is making pricing the derivative-type securities more difficult.
“We heard there was a problem at a very large custodian – their pricing system has suffered some sort of breakdown – and people are having trouble getting quotes for their ETF holdings,” a senior trader at a broker-dealer told Traders. He declined to be named.
Another salesman at bulge firm said he too had heard the reports of a breakdown but declined to provide details, citing compliance constraints on what he report to the media.
Since ETFs are most often run by large money management firms such as Vanguard, BlackRock, Morningstar and others, the ramifications of a pricing breakdown can only hurt eroding retail investor confidence in Wall Street and how it does business. Without accurate pricing of ETFs, whose daily net value is determined at the end of the day, daily trading becomes more speculative and best execution becomes less and less achievable.
With Monday’s equity market rout and the week’s market vacillations, pricing remains difficult according to a bulge bracket firm analyst, with or without a software breakdown.
“This market is difficult enough to trade based on investor behavior, but add an electronic glitch to this and it can only make things worse,” he said.
