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Stein Worries About Impacts of Exchange Traded Products on Market

In a recent speech, SEC Commissioner Kara Stein questioned the impact of exchange traded products, and ETFs in particular on market structure. Stein highlighted the twelve-fold increase in ETF assets in the past decade and the cost-saving benefit that the products have brought to investors. However, she also cited the 2010 “Flash Crash” and questioned what effect ETFs would have on market structure issues.  For example, she questioned whether ETFs would amplify volatility in underlying securities as well as the effect of the products on liquidity and capital formation. She also explored the possible systemic risks posed by the products.  Noting the “interconnected web of participants” involved in exchange traded products, Stein wondered what effect the withdrawal of an authorized participant or the suspension of creations and redemptions would have on the market. Stein also questioned whether redemptions of ETFs holding less liquid assets could increase fire sale risks. Stein expressed concern “that these larger questions have been getting lost in the current ETF exemptive application and exchange listing process, where each product is considered independently, without the kind of broad attention that is necessary to garner the depth of public input I think we need on these questions.” To address these questions, Stein noted that she had requested that SEC Chair Mary Jo White ask agency staff to prioritize a request for comment related to exchange traded product issues.