Could It Happen Again?
The need to refine trading strategies and deal with market and ETF volatility will likely continue as the regulators attempt to address some of the issues that led to the crash. In June, the SEC approved rules that halt trading for five minutes on any Standard & Poor's 500 stock that rises or falls 10% or more during a five-minute period. But the circuit breakers only kick in between 9:45 a.m. and 3:35 p.m., leaving investors vulnerable during the last 25 minutes of trading, when volatility is often at its peak.
Reutemann says that while the measure is a step in the right direction, it doesn't address the root causes of the problem. "The SEC refuses to enforce the ban on naked short selling," he says. "As long as hedge funds take advantage of that to reap billions of dollars in profits, the extreme volatility in the market isn't going to go away." He also favors the reinstatement of the uptick rule. Eliminated in 2007, this rule was designed to put brakes on market freefalls and permitted the short selling of a stock only if its most recent trading price was higher than the previous price.
Paul Justice of Morningstar believes that it is in the best interest of the exchanges to correct some of the problems that triggered the steep spiral since ETFs make up the majority of their trades, and thus the exchanges have a vested interest in keeping these products viable. "If the collective market loses confidence in ETFs, the exchanges will suffer a great deal," he says. "ETFs are no longer the product of a cottage industry that can accept such inefficiencies, even if the majority of their investors were not directly impacted and the blame lies with a third party."