It has been about two weeks now since we wrote our “Phantom Index” paper and we promised to keep you up to date as to the feedback we have received from market participants. Unfortunately, we have yet to hear from any exchanges, regulators or index providers since we published our paper. We thought that exposing the fact that indexes were being calculated with only a subset of data would at least draw some inquiries from the regulators. We understand that they are probably very busy approving the constant parade of exchange fee changes and new order types, as well as arranging for building leases, but we expected at least a courtesy inquiry.
There are many participants in the market that probably wished we never drew attention to this issue and are probably hoping that it “will just go away.” Participants such as exchanges that benefit from volumes that so called “ETF arbitrageurs” provide to them certainly would like this issue to disappear. ETF arbitrageurs who look to profit from these sub second price discrepancies would like this issue to disappear. Index providers who license out their indexes would like this issue to disappear. Data vendors who calculate the index for the index provider would like this issue to disappear. Well, to make sure that the SEC is aware of the “phantom index” issue, we will be filing an official comment with the SEC directly. We intend to make sure that at least they analyze the issue and decide if every trade should in fact be included in the intraday index calculation.
Speaking of indexes, we wanted to point out a very strange occurrence that happened yesterday with some major European indexes. According to Bloomberg, “The AEX Index in Amsterdam, France’s CAC 40, Belgium’s BEL 20 and Portugal’s PSI-20 stopped updating at 9:56 a.m. Paris time and resumed at 1:35 p.m…a spokeswoman for NYSE Euronext in Paris blamed the hiatus on an unspecified “technical incident”.” Read Bloomberg Article Here Even though the index values were not being
calculated, individual stocks were still trading and traders who subscribe to direct data feeds were still able to calculate their own index value down to the microsecond. What is so interesting about this “technical incident” is that it happened just as the major European indexes were breaking down. The CAC 40, BEL 20 and PSI indexes were all down between 2.6% and 3% right before this incident. And then in the 30 minutes after this glitch shut down these indexes, other European indexes magically started to rise. The FTSE 100 rallied almost 1% in the next 30 minutes. It appears this glitch saved the European market from a much bigger decline. The glitch seems to have acted as almost a quasi-circuit breaker. How fortunate for global investors that the “glitch” occurred at this time. Must have been a coincidence, right?