UPDATE 4-Plunge in 10 ETFs triggers ‘flash crash’ memories

* Prices on 10 new ETFS crash briefly at market open

* NYSE says limit orders were placed as market orders

* Nasdaq cancels related trades
(Adds comment, background)

By Rodrigo Campos

NEW YORK, March 31 (Reuters) – Ten new exchange-traded
funds suffered their own mini “flash crashes” just after the
stock market opened on Thursday, suggesting recent measures put
in place to protect against violent market moves may not be

Nasdaq OMX Group Inc (NDAQ.O: Quote, Profile, Research) said it canceled trades in 10
new ETFs sponsored by Scottrade affiliate FocusShares, some of
which briefly plummeted as much as 98 percent.

The latest abrupt share drop comes on the heels of several
sudden and unexplained plunges that remind investors of the May
2010 flash crash, which wiped out nearly $1 trillion in market
capitalization in a few minutes and have kept retail investors
wary of trading stocks.

“I would be surprised if this (a flash crash) doesn’t
happen again in the future, unless they really address these
issues,” said James Dailey, portfolio manager of TEAM Asset
Strategy Fund in Harrisburg, Pennsylvania.

Mechanisms implemented after the May 6, 2010, flash crash,
including single-stock trading halts on shares that have a
price change of 10 percent or more during a rolling five-minute
period, did not cover these new ETFs.

The New York Stock Exchange later said the errors occurred
after market orders were entered that were intended to be limit
orders. Under a market order a stock is immediately bought or
sold at the best available price, while a limit order is meant
to protect an investment by selling a share at a specific,
requested price.

A FocusShares spokeswoman said a mispricing by a market
maker triggered the faulty trades.

Exchange-traded funds own baskets of stocks, or other
securities or commodities, and resemble mutual funds except
that they are priced and traded in real-time on exchanges. In
theory, the funds are supposed to track closely the value of an
underlying index.

The plunge in the ETFs follows similar occurrences in other
shares. Apple Inc (AAPL.O: Quote, Profile, Research) shares dropped by more than 2
percent in just minutes before recovering in February. Last
July, trading in Cisco Systems Inc (CSCO.O: Quote, Profile, Research) shares was briefly
halted after the stock fell more than 10 percent.

The new FocusShares ETFs started trading on Wednesday and
are trying to compete with more established funds by offering
lower costs for broad-market ETFs. Like many new ETFs, the
FocusShares were illiquid and more prone to market

Nasdaq OMX canceled trades in all of the ETFs that were
more than 10 percent lower in price than where they trading
previously, calling them “clearly erroneous.”

The Focus Morningstar Healthcare ETF (FHC.P: Quote, Profile, Research) fell as low as
60 cents after trading as high as $25.33, while the Focus Real
Estate ETF (FRL.P: Quote, Profile, Research) dropped to $1.48 from $25.50.

The canceled trades took place between 9:54 a.m. (1354 GMT)
and 9:56 a.m. (1356 GMT) ,according to Nasdaq.

The FocusShares Focus Morningstar US Market Index ETF
carries an expense ratio of 0.05 percent, less than
broad-market ETFs from Schwab and Vanguard. The sector-specific
ETFs have expense ratios of 0.19 percent.

Schwab’s US Broad Market ETF has a 0.06 percent expense
ratio. The Vanguard Total Stock Market ETF carries an expense
ratio of 0.07 percent, according to Vanguard.
(Reporting by Rodrigo Campos and Angela Moon; additional
reporting by Chuck Mikolajczak and Edward Krudy; editing by
Jeffrey Benkoe and Leslie Adler)

UPDATE 4-Plunge in 10 ETFs triggers ‘flash crash’ memories