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Canada's largest provider of exchange-traded funds is looking into unusual trading in two of its ETFs that caused their prices to plunge far more than the market during Thursday's panic selloff, handing some unlucky investors a hefty loss.

"We're still talking to some of the more active market participants and trying to understand what happened," said Steven Leong, vice-president, iShares Product Management with BlackRock Asset Management Canada.

Trading was briefly halted in both the iShares Dow Jones Canada Select Dividend Index ETF and iShares S&P/TSX Capped REIT Index ETF after their prices had plummeted, he said.

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The dividend ETF, for instance, sank as much as 26 per cent, a decline that was much worse than the broader market or the underlying stocks that comprise the fund. The massive drop suggests that whoever sold the ETF received far less than the ETF's asset value while the buyer made a handsome profit on the trade.

"Today was pretty unprecedented in terms of the volatility spikes we saw … when the U.S. market sold off in a way that we've never seen it sell off before," Mr. Leong said.

Two market participants told him their data feeds became unreliable at the height of the panic, which may have contributed to the unusual trades, he said. It's also possible that market makers, whose job is to keep an orderly and liquid market in the units, may have not been able to respond quickly enough given the extreme volatility.

Market makers, also known as designated brokers, are essential to the smooth functioning of the ETF marketplace. Their role is to maintain liquidity by offering to buy or sell ETF units when nobody else will, and also to set the "goalposts" for the bid and ask prices. But in a highly volatile market, it may not be possible to move the goalposts quickly enough.



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One possible explanation for the huge price drops is that one or more retail investors placed a sell order "at market," without specifying a minimum price. That would have left the investor vulnerable to an opportunistic buyer who scooped up the units at a price well below the ETF's asset value.

"I don't know in particular, but it's likely that on one side of the trades there was a market order, and on the other side there could have been a limit [order] but we don't have specific knowledge of that," Mr. Leong said.

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"Generally speaking, we do say that limit orders [which specify a price]are your best bet for protecting against these scenarios."



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