This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Lessons of Knight Capital

These spreads could hurt retail investors who can't get out of the quoted spreads, especially those investors using market orders that could further widen the advertised spreads. Larger registered investment advisers can call liquidity desks and get a narrower spread, but most retail investors have no choice but to follow the spreads, according to Weisbruch.

"Market makers may be hesitant at first with certain low-volume ETFs, primarily those with very little assets under management as well as tenure in terms of years since inception," he adds. "This is a byproduct of 'seed capital' and 'holdings' issues as well as the nature of the underlying basket of the ETF in focus. Eventually market makers will step in and the spreads will tighten again."

The spreads did, in fact, narrow again quickly, dropping back down to 0.79% two days after the glitch, according to IndexUniverse.

Overall, the Knight Capital debacle has been a "story of brutal efficiency for ETFs," says Nadig. Only ETFs trading fewer than 50,000 shares a day and a few utility ETFs were affected, but only for a very short period of time. Other lead market makers stepped in relatively quickly and brought spreads and prices back to normal levels.

The ETF market did prove its efficiency, but ETFs are still derivative instruments, dependent on their underlying holdings. Thus, they may be more susceptible to these market disruptions.

3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,964.18 -18.41 -0.11%
S&P 500 1,976.13 -2.78 -0.14%
NASDAQ 4,453.2350 +8.3260 0.19%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs