Chief Investment Officer Larry Whistler discusses the recent Federal Reserve Statement on this week’s release of the Take Five.

Chief Investment Officer Larry Whistler discusses last week’s top five economic events in Nottingham’s first release of Take Five.

This is August! Markets Aren’t Usually This Strange..

While most of the country was sleeping at 3am Monday morning, August 24th 2015, the Chinese equity markets were just about to close. The benchmark composite, the Shanghai Composite, had fallen -8.49% on the day. Including the prior two trading sessions, the entire composite fell over -15%! The U.S. Futures market, relating much of the news around China, started to experience heavy volatility before the market opened on Monday.

pic vix 2Meanwhile, in Chicago, The VIX index value was increasing exponentially. The VIX Index is the Chicago Board Options Exchange Volatility Index, which measures a market estimate of future volatility based on the weighted average of the implied volatilities for a range of strike prices for options. On Monday morning, the VIX reached 54, a level not reached since late 2008 amidst the global recession. A normalized VIX value would be near 20. Seeing the potential for extremely high volatility surrounding securities, at around 9 am, exchange specialists at the New York Stock Exchange (NYSE) invoked Rule 48.

Rule 48, when invoked, stops exchange specialists from determining the opening price of a security. Normally, specialists at the NYSE receive indications of where a security will open, two to three minutes before the start of trading. This information, along with historical pricing and the activity in the futures market, helps specialists determine what the opening price of a security should be. Here’s the literature of Rule 48:[1]

  1. In the event that extremely high market volatility is likely to have a Floor-wide impact on the ability of DMMs to arrange for the fair and orderly opening, reopening following a market-wide halt of trading at the Exchange, or closing of trading at the Exchange and that absent relief, the operation of the Exchange is likely to be impaired, a qualified Exchange officer may declare an extreme market volatility condition with respect to trading on or through the facilities of the Exchange.
  1. In the event that an extreme market volatility condition is declared with respect to trading on or through the facilities of the Exchange, a qualified Exchange officer shall be empowered to temporarily suspend at the opening of trading or reopening of trading following a market-wide trading halt: (i) the need for prior Floor Official or prior NYSE Floor operations approval to open or reopen a security at the Exchange (Rules 123D(1) and 79A.30); and/or (ii) applicable requirements to make pre-opening indications in a security (Rules 15 and 123D(1)).

The purpose of Rule 48 is to allow for the quicker and easier opening of individual securities (theoretically). If the specialists are not formally pricing stocks, like with Rule 48, the market will essentially dictate the prices for them. The implied equity volatility pre-market for securities led specialists to believe that they would likely be unable price stocks accurately. Due to this volatility, specialists would rather let the market price the securities, theoretically delivering smoother price action for the beginning of the trading day.

On Monday morning, the S&P 500 eMini futures were halted from trading around 5 minutes before the market was even set to open. This was due to the volatility that the futures were experiencing, which caused a circuit breaker to kick in. The futures market, much like the regular stock market, has volatility limits that can halt trading for a certain amount of time. With the volatility in premarket trading and a large number of securities halted in early trading, it became incredibly difficult for market makers to make markets around securities during the first 15 minutes of trading.

Market makers are individuals who take information from both the exchange specialists and the data surrounding futures and create a “market” for securities to trade. They help set the spread between what the bid price and the offer price of any given security. Due to the lack of information, it became very difficult for market makers to create said “markets” for securities, causing bid/ask spreads to widen more than usual. For example, see chart below:


This is the trade blotter for the iShares S&P 500 Index ETF (ticker: IVV) from Monday morning. The left side indicates the time when the trade occurred. The Bid/Ask spread for IVV is usually only $0.01. After the market had been open for 16 seconds, the Bid/Ask spread for one of the most liquid securities in the world was just shy of $14 wide (squared in red)!

As the market was opening up, the downtrend in many stock prices caused stop-loss orders to be triggered. Stop-loss orders change to general market orders when the trading price falls to the stop-loss order’s indicated price, allowing for the original stop-loss order trade to be executed. Since many of these executions were above/below 5% of the prior execution, the “limit up/limit down” rule caused circuit breakers to kick in and halt trading of individual stocks. The 5% up/down rule came to fruition during the market “Flash Crash” of 2010. The “Limit Up/Limit Down” is a rule imposed to help suppress volatility surrounding a security by halting its ability to trade. If the price of the security trades either 5% higher or lower from the reference price, the security will be halted for a minimum of 5 minutes.

So how were ETFs affected? Well, for many ETFs, market makers were having difficulty pricing various ETFs, as many of their underlying securities were halted from trading. This also caused many ETFs to be halted from trading as well. According to BlackRock, the iShares MSCI USA Minimum Volatility ETF (USMV) was halted 8 times as the ETF price declined below the value of the underlying basket of securities. USMV was halted for a total of 40 minutes between 9:30am and 10:19am. By 10:20, the ETF resumed trading in line with the basket of underlying securities, as seen the graph below:pic3

This graph represents the difference between USMV’s trading price and its corresponding Net Asset Value (NAV) during the timeframe that USMV was halted. The green line represents the price of the underlying basket, or NAV, while the white line represents the actual ETF price. While the Net Asset Value of USMV stuck true to its underlying securities, the ETFs price did not reflect the underlying value of its holdings. During the course of a normal trading day, if a single security is halted, an ETF owning that security would continue to trade around the halted security, eventually reflecting a price near the NAV of the underlying securities. It wasn’t until around 10:30am until the prices of ETFs more closely reflected their NAV.

An ETF’s price is usually reflective of its NAV due to market participant’s ability to exchange ETF shares for a basket of its underlying securities, or vice versa. For example, when the basket of securities can be purchased at a price lower than the indicated price of the ETF, market participants can buy the underlying holdings and exchange them for shares of the ETF (creating new shares of the ETF). Due to the ability to earn an arbitrage profit, the price of an ETF very closely tracks the value of its underlying holdings.

For investors who like to trade their own portfolios, we suggest two best practices for trading that aim to improve overall trade execution:

  1. Avoid trading within the first 30 minutes after the market opens and the last 30 minutes before the market closes. Because of the difficultly for price discovery between sellers and buyers of individual securities within the first 30 minutes, it may be challenging for investors to execute trades at a reasonable price. The first and last 30 minutes of the trading is usually characterized by above average levels of volume, also increasing the possible volatility for any given security.
  2. Use limit orders when placing trades. Regular market orders are filled at the National Best Bid and Offer price, ensuring a guaranteed execution. A market order to sell during the time when USMV fell resulted in an execution price that was not reflective of the NAV of the ETF. Using limit orders can reduce risk associated with trading.

Moving forward, the events of August 24th are likely to spur another round of debate around financial market regulations. Monday’s events showcased that improvements to recent rules such as Rule 48 and the Limit up/down rule may be warranted. With the growing use of ETFs as investable vehicles, their market share is likely going to continue to grow. As such, old regulations will likely be updated and fine-tuned to protect investors of all sizes.

Until next time,

Jason Cassorla

[1] NYSE Rules, Rule 48. Exemptive Relief – Extreme Market Volatility Condition.


The Nottingham Advisor Chart Book is our internal chart book aimed to deliver a wide set of commentary on the most pertinent graphs and illustrations from today’s economy.  As always, feedback on our publications is welcome.  If you have any questions or comments, never hesitate to contact us, as we continually strive to “prove our worth, by building yours.”

Chartbook Image

Featured in, Chief Investment Officer Larry Whistler provides insight for one of the most important measures of Fixed Income risk in his article, “It Really Is Time To Understand Duration.”





As the Federal Reserve embarks on its long-awaited interest rate “normalization” voyage, portfolio managers need to prepare their portfolios for the journey. As passengers on this ship, intended or not, bond holders everywhere will feel the sting of rising rates for the first time in nearly 10 years.

We’ve noticed a certain complacency having set in in the fixed-income arena, with few investors properly acknowledging that, indeed, one can lose money in bonds!

Five Big Bond ETFs

The largest fixed-income exchange-traded funds by assets are:

That’s more than $100 billon invested in those five ETFs alone. Although hardly identical, they all share one measure that investors should be focusing on right now: duration.

To read the entire article please click here.

The Nottingham team joined 12, 375 people within 396 local companies this past Thursday to run the 35th annual Corporate Challenge. The 3.5-mile race this year benefits two widely-respected not-for-profit organizations in the Buffalo community, Kevin Guest House and the Angel Fund at Roswell Park Cancer Institute.CorpChalCorpChal_Nieman_109

Portfolio Manager Christopher Hugar comments for the article “Solving the Income Riddle” by Olivier Ludwig.

We suggest investors divorce themselves from the idea that liabilities must be funded by income and income alone. Instead, it’s important to remember there are two ways to generate portfolio returns: either via income or capital gains. What’s more, it’s our view that the current environment has actually skewed return profiles toward the latter, at least in the near term.

Since 2009, quantitative easing has been the response of choice for deflation-fighting central bankers around the world. At its core, QE is specifically designed to suppress yields in an effort to push investors further out on the risk spectrum to reflate asset prices. By their very design, these programs tilt the scale away from income and toward capital gains. It’s suggested that investors shouldn’t “fight” central bankers, and pursuing yield alone in this environment feels a little bit like that.

With the Fed officially ending its QE program in 2014, the United States is now a tough environment for income-seekers and total return-seekers alike. Instead, we suggest investors look abroad. Consider the iShares MSCI EAFE Minimum Volatility ETF (EFAV | B-64), which yields just more than 3.0%. Roughly 40% of the fund is allocated to Japan and the eurozone.

Both are areas that have reasonable valuations, and central bankers are still aggressively pursuing QE, suggesting future gains will more than make up for the shortfall in any 5% yield bogey. As an added bonus, the product is even designed to have a lower-volatility profile—a favorable attribute for most income investors.

To read the entire article please click here.

Written by Portfolio Manager Matthew Krajna, The Select Managers Program Quarterly Review is issued to provide color to both strategy and individual fund performance and highlight any portfolio changes that have been made throughout the period.

NASMP Q1 2015 Review

If you have any questions or comments, or would like to discuss any of the NASMP strategies in further detail, please do not hesitate to contact our office at 716-633-3800 or e-mail: [email protected]

Nottingham Advisors’ President and Chief Investment Officer, Larry Whistler, was quoted in this weekend’s edition of Barron’s in Chris Dieterich’s article, “International-Focus ETFs Beat U.S. Counterparts.”  In the article, Dieterich highlights the recent trend of investors pulling assets out of U.S. stock ETFs and putting assets into international stock ETFs.  Nottingham’s own Larry Whistler summed up the shift with, “investors are starting to get reallocated.”

Not only does Dieterich highlight this shift, he also contends that it is actually warranted based on fundamentals.  According to the author, while the S&P 500’s CAPE (cyclically adjusted price/earnings) ratio of 27 is well above its median of 16, the same metric for the rest of the developed world averages just 17, below its median of almost 23.  In fact, we made a similar call back in February, urging investors to maintain a more global mandate amidst attractive international valuations and shifting economic dynamics.

Thus far, investors have not been disappointed as Dieterich highlights the performance of international equities through the first part of 2015.  Investors with direct exposure to both Japan and Europe have been well rewarded as ETFs tracking the two regions have handily outperformed the +3.46% gained by SPDR’s S&P 500 ETF.

ETF Blog Post 4272015

In the article, Larry also provides an option for those investors looking for a more diversified approach.  He mentions one of Nottingham’s current holdings, the Powershares FTSE RAFI Developed Markets ex-US ETF (PXF), a fund that owns stocks from both Japan and Europe and weights them on the basis of certain fundamentals.

Only time will tell if 2015 serves as the year that international developed equities returned to favor, but Dieterich’s article has some compelling points.  For those of you that are interested, the entire article can be found here.  For those of you that still prefer the time-honored delivery method of paper print, the article is located on page 34 of the April 27th, 2015 edition.

Below please find the link to the Nottingham Advisors Chart Book.  This is our internal chart book aimed at providing a wide variety of graphs and illustrations related to various domestic and international macroeconomic data points.  As always, feedback on our publications is always welcome.  If you have any questions or comments, please do not hesitate to contact our office.

Chart Book Q1 2015