Société Générale, parent bank of Lyxor and the sole official market maker for the London Stock Exchange’s listing of Lyxor Japan TOPIX , had failed to post bid and offer prices for the fund not only for most of Tuesday morning, but also for the majority of the time since Japan’s earthquake and subsequent tsunami struck in the early morning (European time) of Friday March 11.

"This extremely high volatility made it very difficult for market makers to maintain their quotes. In the specific case of LTPX, which is listed in London, the situation has been made even more difficult as Société Générale (SG) is the only official liquidity provider on the product" - Lyxor’s deputy head of ETFs, Nizam Hamid

Source: Japan ETF Spreads Spike

My comment:

Stay away from ETFs that solely rely on a single counterparty to trade. Imagine if the market maker just halt trading, you cannot even sell.

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Derek   |220.255.1.78 |2011-03-24 23:13:54 Thanks Wilfred for the article. I was still researching on buying this ETF and the last thing on my mind is not being able to buy and sell. Reply | Quote 0   0

Data   |202.156.10.231 |2011-03-24 23:34:48 Looks like db x-trackers MSCI Japan TRN Index ETF was also affected. Both are synthetic ETFs with one market maker, according to the article you linked and this commentary by FT Alphaville. http://ftalphaville.ft.com/blog/2011/03/23/5245... I wonder if the local listings of the Lyxor and DBXT ETFs 'malfunctioned' too. Already it isn't a good idea to invest in them because of liquidity issues, and now this. Reply | Quote 0   0

Garrett  - Does it matter?   |141.211.21.247 |2011-03-25 08:08:15 Good article Wilfred, but does it matter for the investor? First, people shouldn't be panic selling during this sudden crash. Plus, from a portfolio standpoint, it does not make sense to have a huge percentage to a single country like Japan. Even assuming one is invested in a pure Japan fund, it would at most make 20% of one's portfolio. The drop of EWJ from peak to through during this time was only 15%. It would hardly make a dent (3% to be exact) in the entire portfolio. Of course, it works both ways as well, buying opportunities are ruined by the bid-ask spread. Reply | Quote 0   0

Wilfred   |SAdministrator |2011-03-25 12:36:59 Garret, Yes it matters alot. It is not about Japan whatsoever as that's an asset allocation decision. It is about exposing oneself's to non-systematic risk. Remember that non-systemetic risk does not reward the investor. In this case, the market maker is the non-systemtic risk. Remember during the Lehman Minibond product fiasco? Many people thought they are buying into a diversified groups of bonds issued by different companies. It turns out that Lehman Brothers was the weakest link. Do remember that this and similar types of ETFs rely on the swap counterparty and market maker to do their job. It turns out that both entities are the same party. The above article highlights the weakness of this type of ETFs in times of market volatility. It also a demonstration that traditional fund-based ETFs did very well during market volatility as shown by the relatively low bid-ask spread. Reply | Quote 0   0

Francis   |220.255.2.171 |2011-03-25 19:22:22 If we do not buy either Lyxor Japan Topix or db x-trackers MSCI Japan TRN Index ETF , then we are only left with unit trusts for Japan in SG Reply | Quote 0   0

Wilfred   |SAdministrator |2011-03-25 21:50:27 How do you know UTs are not worst? The fund manager could engage in more derivative trading than the swap-based ETFs. Reply | Quote 0   0

Jared Seah   |62.41.77.105 |2011-03-29 17:28:14 Thanks Wilfred! I onced expressed concerns about the low liquidity of some ETFs as I was worried that a big bid and offer spread means I can't get out (without big hair-cut) when I want out. I was told that the ETF market maker will always offer me a bid - safe lah! Yeah right! Thanks to you, I now know better! No bid how to exit? Reply | Quote 0   0

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