8 ms·

One thing I am trying to understand . lets say there is a super flash crash and take Acme INC Day 1: (before crash) price : 200$ S&P 500 weight : 2% Day 2

One thing I am trying to understand . lets say there is a super flash crash and take Acme INC Day 1: (before crash) price : 200$ S&P 500 weight : 2% Day 2 :next day market crashes. Acme is very low volume so price crashes to 1$ . what happens next ? do all the EFT that follow S&P have to sell all ACME for 1$ because it is not in the S&P 500 anymore. Day 5 : ACME jump back to 200 $ and is back in the S&P 500. So my question is what would have happen to a passive investor. if he bought 1000$ worth of ETF right before the crash. Will he still have a 1000$ dollars at the end of it .

thoughtstheseus 7y ago
Index changes don’t happen like that and a drop that large would freeze trading.
- badfrog 7y ago
  There is no market rule that prevents a single stock from dropping 99% in a day. LULD only halts trading for a few minutes, then there's an auction that could result in any price.
  - ckdarby 7y ago
    There is no market rule that requires a single stock from not being halted. Please show me a one day 99% drop on a stock. Trading would be halted well before that to prevent manipulation or errors.
    - badfrog 7y ago
      The rules are covered here: https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html https://www.sec.gov/oiea/investor-alerts-bulletins/investor-... LULD is the one that applies to single stocks. It only results in a five minute halt, as I said. The market-wide circuit breaker can halt the entire market for a full day, but only in response to a 20% move in S&P500, not a single stock.
    - saimiam 7y ago
      If it were a straight drop of 99% - say it is trading at $100 at tick_1 and at tick_2, it is trading at $1, trading will be halted at point which happens to be after a 99% drop. In reality, stocks gap downwards in a series of shallow steps which are unlikely to be 99% in one tick. More info on the 10% trading halt rule: https://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts https://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts
holdenc 7y ago
The S&P reconstitutes itself four times a year. But, imagine that your scenario worked anyways -- the investor would have less than $1000 since the S&P index missed the recovery of Acme Inc. But considering the largest constituent of the S&P (MSFT) is only around 4% of the index total weight, the impact of Acme Inc's price decline would not be great.

thoughtstheseus 7y ago

Index changes don’t happen like that and a drop that large would freeze trading.

badfrog 7y ago
There is no market rule that prevents a single stock from dropping 99% in a day. LULD only halts trading for a few minutes, then there's an auction that could result in any price.
- ckdarby 7y ago
  There is no market rule that requires a single stock from not being halted. Please show me a one day 99% drop on a stock. Trading would be halted well before that to prevent manipulation or errors.
  - badfrog 7y ago
    The rules are covered here: https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html https://www.sec.gov/oiea/investor-alerts-bulletins/investor-... LULD is the one that applies to single stocks. It only results in a five minute halt, as I said. The market-wide circuit breaker can halt the entire market for a full day, but only in response to a 20% move in S&P500, not a single stock.
  - saimiam 7y ago
    If it were a straight drop of 99% - say it is trading at $100 at tick_1 and at tick_2, it is trading at $1, trading will be halted at point which happens to be after a 99% drop. In reality, stocks gap downwards in a series of shallow steps which are unlikely to be 99% in one tick. More info on the 10% trading halt rule: https://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts https://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts

holdenc 7y ago

The S&P reconstitutes itself four times a year. But, imagine that your scenario worked anyways -- the investor would have less than $1000 since the S&P index missed the recovery of Acme Inc. But considering the largest constituent of the S&P (MSFT) is only around 4% of the index total weight, the impact of Acme Inc's price decline would not be great.