Blake Hornick Quoted in Law360
"SEC Review Could Lead to Slowdown in ETF Trading"

Seyfarth Shaw Securities partner Blake Hornick was quoted in Law360 on October 19. The article discussed the U.S. Securities and Exchange Commission (SEC) review of exchange-traded funds (ETF), which have recently undergone a high level of scrutiny regarding how they affect securities markets.

"They're trying to find a way to make it harder for ETFs and other inside market participants to make a lot of money on short-term markets for stocks. I don't think they know how to do it," said Blake.

Similar to mutual funds, ETFs may track underlying benchmarks or securities indices or are actively managed, but ETF shares can be traded throughout the day on a securities exchange, and they now include derivatives such as credit default swaps. While retail investors have been warned about potential risks related to ETFs by financial regulators, ETF supporters say those criticisms have been exaggerated, despite their tendency to reflect wild market swings.

According to critics, ETFs seek to profit on small changes in price, which have little relation to the company, rather than investing in stocks based on the quality of a company. Blake said that the high-powered computers used by ETFs and high-frequency traders trade on minute price changes in stocks, which tend to push out average investors, making it difficult for them to buy and hold stocks, since "these trades are done before anybody knows they've been done."

The article provides suggestions for regulation, such as requiring equities markets to initiate an automatic delay on trades so that market participants have the opportunity to view price changes before the trade closes, or as Blake mentions, the unlikely option of only allowing institutional investors to put money into leveraged ETFs, as done in Europe.