ETF fluctuating spread

Ceme3000

I bought a rather niche small ETF last week (SPOG) which is S&P Oil and Gas Commodity Producers and have been keeping a casual eye on the price since.
This morning I looked and the spread was 19%.  10 minutes later it was 1.99% and the bid price had gone up by 7%.
What is going on behind the scenes to cause such a wide spread for a brief period of time? I'm not concerned,  it's just curiosity.

bowlhead99

When you look first thing in the morning there is typically an auction process to ascertain what people are willing to pay to buy and sell, during which time the spread can widen even when you are seeking quotes of normal market size.

Especially if you are not actually seeking a live quote from a broker but just looking at a data feed of bid/offer prices with a rolling 15-min delay as published on a broker or stock exchange or news website, it may appear that this early morning 'wide spread' period goes on longer than it actually does, while the fair price is being established before normality takes over.

Thrugelmir

Simple answer is that if there's more sellers than buyers. Shares in the fund must be redeemed which places strain a strain on liquidity of trading in the underlying assets. 

Ceme3000

Thrugelmir said:

Simple answer is that if there's more sellers than buyers. Shares in the fund must be redeemed which places strain a strain on liquidity of trading in the underlying assets. 

But temporarily inflating the buy price by 19% will put off buyers. How does putting off buyers impact trading liquidity. 

bowlhead99

Ceme3000 said:
But temporarily inflating the buy price by 19% will put off buyers. How does putting off buyers impact trading liquidity. 

It is just part of the price discovery mechanism. If there is only 1000 shares of stock available, see who will be willing to pay (e.g) 20% more than the apparent sell price and who will be willing to sell for (e.g) 20% less than the apparent buy price. As more stock becomes available because there are more buyers and sellers making sensible bids between the extreme prices, the fair price is discovered and the spreads narrow.

One of the ETFs I held and was looking to reduce the other week was at £15-£25 one morning (so 50% spread around the £20 mid point) after the US had fallen heavily the previous night and Asia/UK opened down. Somewhere between 8.15am and 8.30am it settled to a £20 purchase price (which was several percent below previous day price, but not 30% below previous day price) and I sold. If I had been panicky and just accepted the £15 selling price because I thought the world was collapsing, I would have been a loser. But it was a $500m ETF holding a broad mix of global stocks and a 25% overnight was not reasonable, so of course I didn't accept the initial price offered, I just waited until it was trading more normally.

Thrugelmir

Ceme3000 said:

Thrugelmir said:

Simple answer is that if there's more sellers than buyers. Shares in the fund must be redeemed which places strain a strain on liquidity of trading in the underlying assets. 

But temporarily inflating the buy price by 19% will put off buyers. How does putting off buyers impact trading liquidity. 

The spread will be discounting the value of the underlying securities not inflating. 
You sell your ETF shares. 
The fund then has to liquidate the actual investments.
The underlying shares may have wide spreads if they are themselves thinly traded with little liquidity. 
The spread will be determined by stock market makers. Who are required to maintain prices in the stock.
In volatile markets price extensions can be granted on individual shares. In essence this is a short time freeze. Which enables market makets to maintain an orderly market in a particular stock. With robo and online trading these days. Speed of activity can be difficult to keep up with. 

 

Ceme3000

Thank you, that makes more sense now.  With the 15 minute delay on pricing you certainly need to carefully check the quote price when buying and not get a little click happy.  I wonder how many people have learned that the hard way!

EdGasketTheSecond

Sometimes you can't trade an ETF at all temporarily and sometimes shares too when in auction. You might also not be able to trade an ETF if prices are moving fast in my experience. You can get a free live price at uk.ADVFN.com but only for a very short time, or get the ADVFN app where you at least have time to read the price as it remains displayed but not updated.

Qustion: Does anyone know how often the ETF has to buy/sell it's underlying shares to match buying and selling of the ETF? Is it done in real time or once or a few times a day? I imagine it can't be any less than daily or the fund would be exposed to adverse movement in it's position.

Thrugelmir

EdGasketTheSecond said:

Sometimes you can't trade an ETF at all temporarily and sometimes shares too when in auction. You might also not be able to trade an ETF if prices are moving fast in my experience. You can get a free live price at uk.ADVFN.com but only for a very short time, or get the ADVFN app where you at least have time to read the price as it remains displayed but not updated.

Qustion: Does anyone know how often the ETF has to buy/sell it's underlying shares to match buying and selling of the ETF? Is it done in real time or once or a few times a day? I imagine it can't be any less than daily or the fund would be exposed to adverse movement in it's position.

There's authorised particpants (AP's) who exchange underlying securities with the product issuers for ETF shares. AP's will make an arbitrage on the trade. Hedging will be used a tool to protect gainst extreme volatility.