Trades In New FocusShares ETFs Busted

by on March 31, 2011 | ETFs Mentioned:

The new FocusShares ETFs have only been trading for two sessions, but have managed to attract attention for a number of different reasons already. The unit of Scottrade debuted 15 U.S. equity ETFs yesterday, making a splash in the ETF industry with rock bottom expense ratios that undercut many of the competitors. The new ETFs will also be available commission free in Scottrade accounts, helping to level the playing field with brokerages such as TD Ameritrade and Fidelity that have already rolled out commission free ETF trading [see FocusShares Debuts Bargain Basement ETFs].

But on Thursday several of the FocusShares ETFs were in the spotlight because of a series of events that triggered flashbacks to the Flash Crash of last year. Nasdaq said it canceled trades in 10 FocusShares ETFs on Thursday after some of the funds plummeted by as much as 98%. Nasdaq OMX canceled trades in ETFs that dropped by more than 10%, noting that these price points were “clearly erroneous.”

Based on pricing information for the FocusShares ETFs, it seemed that ten of the 15 products was impacted by the error. Shares of the Healthcare Index ETF (FHC) tumbled to less than $1.00, losing more than 96% of their value at one point. Several other tickers, including FLG, FBM, FFL, and FRL, declined by as much as 80% on the day. Others momentarily lost about 25% of their value:

Name Ticker Open Thursday Low
Focus Morningstar US Market Index ETF FMU $25.40 $20.07
Focus Morningstar Large Cap Index ETF FLG $24.45 $2.50
Focus Morningstar Mid Cap Index ETF FMM $25.46 $25.44
Focus Morningstar Small Cap Index ETF FOS $25.52 $25.50
Focus Morningstar Basic Materials Index ETF FBM $25.60 $3.81
Focus Morningstar Communication Services Index ETF FCQ $25.44 $12.68
Focus Morningstar Consumer Cyclical Index ETF FCL $25.99 $25.42
Focus Morningstar Consumer Defensive Index ETF FCD $24.34 $6.57
Focus Morningstar Energy Index Index ETF FEG $25.60 $25.53
Focus Morningstar Financial Services Index ETF FFL $25.18 $2.93
Focus Morningstar Healthcare Index ETF FHC $24.45 $0.89
Focus Morningstar Industrials Index ETF FIL $25.38 $20.00
Focus Morningstar Real Estate Index ETF FRL $25.50 $1.04
Focus Morningstar Technology Index ETF FTQ $25.15 $25.15
Focus Morningstar Utilities Index ETF FUI $25.43 $2.62

Scottrade issues a statement on the busted trades:

During the first half hour of trading today, Nasdaq OMX (NDAQ.O) and the NYSE cancelled certain trades in some of the Focus Morningstar ETFs. This was due to a process error at Knight Capital Americas, one of the lead market markers, for the FocusTM Morningstar ETFs. Knight resolved the issue quickly and the affected Focus Morningstar ETFs traded normally for the rest of the day. The value of the affected Focus Morningstar ETFs and the value of the underlying securities and shareholders were not impacted.

Last year exchange-traded products were at the heart of the “Flash Crash” that saw various securities temporary lose nearly all of their value [see Ten ETF Charts From The Flash Crash]. The fallout from that day sparked intense debate over the need for regulatory reform, and prompted many to take a closer look at ETFs. The mispricings in Thursday’s trading seem to have been limited to FocusShares products; there were no other canceled trades reported in ETFs from other issuers [see How ETF Investors Can Protect Themselves From Another Flash Crash].

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Disclosure: No positions at time of writing.