EFT's are funds that have a bunch of companies.
Actually not true with ETFs. You are not investing in companies.
You are buying creation units. They are appropriate for high-risk frequent traders that know the complexities and risks of ETFs.
“If individual investors can't resist the temptation to jump into the fray and trade themselves silly, then they will just be making Wall Street richer, as well as justifying John Bogle's famous claim that ‘An ETF is like handing an arsonist a match.’" Source: Investmentnews
"The price of an ETF is based on the arbitrage opportunity between the ETF price and the price of the underlying securities. When things get squirrelly, authorized participants will allow the price of the ETF to drift to a point where they think they can still make money. They will then step in to be that buyer of last resort only when they are sure that the basket of securities they’ll receive doing a redemption can be unloaded for a profit.”
You have to calculate a “bid fair value” and an “a fair value” for every one of the underlying holdings, then compare that with the bid and ask of the ETF. In fact, that’s exactly what market makers do while they’re trying to figure out when to leap in and arbitrage out any price discrepancies.
In the US "flash crashes" many ETFs traded at $0.01 bid (to sell) because the participating dealers did not make bids. In the first crash, the SEC allowed the reversal of many of these ETF $0.01 sells but shows the risks - especially if you use stop-loss orders when there are no bids.
"The 2015 flash crash wasn’t unprecedented: In 2010, another flash crash dropped some ETF prices as much as 60% in a span of just 20 minutes, according to the Securities and Exchange Commission. For a few horrific seconds, shares of the iShares Russell 1000 Growth Index ETF (IWF) traded for a penny. Vanguard Total Stock Market ETF (VTI) sold for 13 cents.
"What happened? In short, market makers walked away at the worst possible time.
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Can it happen again— Yes.
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ETF pricing depends on the ability of large investors to arbitrage the difference between the value of an ETF’s underlying shares and its market price. When the two prices diverge too far, institutional investors can buy or sell creation units – blocks of stock in proportion to an ETF’s holdings – and profit from the price difference between the two." - InvestmentNews
In many places, you’ll just take the last spread the day—at the close—and average that out of some number of days. The problem is that closing spreads are just plain dumb. Most investors should never be trading at the close at 4 pm due to the mechanics of getting end-of-day quotes in the last 15 minutes. See below
Free brokerage accounts are not "free." For example, Robinhood makes millions on free accounts with spreads and on dealer order flow payments. Revenue was $420m in the first quarter of 2021 but still had a $1.4b loss. In 2020 it had a profit of $7 million on "free" accounts.
This is the market mess you get into at market close auctions on the NYSE, I believe it is similar for the TSX and other major exchanges.
MOC= Market on close orders
LOC = Limit on close orders
CO= Closing offset orders
3:50 pm
Cutoff time for MOC/LOC order entry. Systemic publication of MOC/LOC Regulatory Imbalance is released. Thereafter only offsetting MOC/LOC and CO orders are allowed.
3:50 pm - 3:59:55 pm
Informational Imbalance publication is disseminated every 1 second. Includes the Paired-off quantity, Order Imbalance, Closing Only Interest Price, and Indicative Clearing Price.
3:55 pm d-Quotes and pegged e-quotes to be included in the indicative Clearing Price dissemination.
3:50 pm - 3:58 pm Only MOC/LOC orders that are documented errors may be canceled.
3:58 pm No cancels after this point, except as provided by Rule 123C(8)(a)(ii).