Exchange-Traded Funds (ETFS) and FINTECH: Market Efficiency and Systemic Risk

Routledge Handbook of Financial Technology and Law.

University of Oslo Faculty of Law Research Paper No. 2020-33

17 Pages Posted: 14 Oct 2020

See all articles by Jay Cullen

Jay Cullen

Edge Hill University School of Law, Criminology and Policing; University of Oslo

Date Written: October 13, 2020

Abstract

This paper argues that developments in ETF and FinTech markets mark a qualitative shift in the function and interpretation of information. Whilst trading becomes quicker, nimbler and more voluminous under passive investment strategies augmented by automation, the role of information also changes in subtle ways. In particular, under these conditions, financial market prices will become increasingly self-referential. That is to say, investors in markets will no longer make investment decisions based upon information gathered by themselves or others – a hallmark of the efficient markets hypothesis (EMH) – but through acting on the trading of a smaller and smaller group of active traders, whose composition and predictions will drive market movements. Traders operating in this way invest purely on a momentum basis, and may crowd out the trades of more informed, active investors. This, in turn, may undermine the price formation mechanism, especially if the composition of views amongst informed traders is skewed by behavioural biases in a particular direction. Importantly, the disruptive impact of certain automated trading reduces the incentive for information gathering, as these algorithmically-driven vehicles free-ride on research by active traders and use their resources and speed to front-run their trades. One effect of these developments is a reduction in the informativeness of financial market pricing which, if persistent enough, may cause systemic instability.

Suggested Citation

Cullen, Jay, Exchange-Traded Funds (ETFS) and FINTECH: Market Efficiency and Systemic Risk (October 13, 2020). Routledge Handbook of Financial Technology and Law., University of Oslo Faculty of Law Research Paper No. 2020-33, Available at SSRN: https://ssrn.com/abstract=3710610

Jay Cullen (Contact Author)

Edge Hill University School of Law, Criminology and Policing ( email )

St Helens Road
Ormskirk, L39 4QP

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
181
Abstract Views
705
Rank
300,534
PlumX Metrics