ETFs Threaten to ‘Amplify’ Systemic Risk When Liquidity Dries Up
- New Moody’s report warns of problems if traders back away
- Market making is now done by electronic brokers, not banks
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Exchange-traded funds face a growing threat from the very traders who sustain them, according to Moody’s Investors Service.
The $3.9 trillion U.S. industry could feed systemic risks if market makers, which play a crucial role keeping the price of an ETF in line with its underlying value, step away during turmoil, analysts led by Fadi Abdel Massih wrote in a report. Less liquid asset classes would bear the brunt of the pain. The theory might be in for a test as equities crater, with the S&P 500 Index down about 3.5% in the past four days and headed for its worst week of the year.