As first reported by Reuters, the SEC is investigating a possible connection between high-frequency traders and instances where ETFs failed to settle on time. The inquiry began as a probe into complex ETFs, but was expanded to include more popular ETFs after a large trade in an unnamed liquid ETF failed to settle in four days. Regulators are concerned that failed settlements could contribute to volatility and systemic risk in the markets. They are also studying links between ETF prices and the value of the ETF's underlying securities.
ETF industry leaders assert that the data on failed settlements is faulty because it does not take into account the fact that market makers (who typically buy and sell ETF shares) have seven days to clear trades instead of the standard four days. Also, according to Dave Nadig, director of research at IndexUniverse, it is impossible for an ETF trade to truly fail since the National Securities Clearing Corporation (NSCC) guarantees delivery of ETF shares.