Good morning. My name is Noel Archard -- I’m a Managing Director at BlackRock and I

 
 
 
  
 
 
 
 
Remarks Prepared for Delivery 

CFTC-SEC Advisory Committee on Emerging Regulatory Issues 

August 11, 2010 

Noel Archard 

Managing Director 

BlackRock 

Good morning. My name is Noel Archard -- I’m a Managing Director at BlackRock and I 
head the Product Team for the US exchange-traded fund (ETF) business. I greatly 
appreciate the opportunity to speak with you today about the impact of the May 6
th
 “Flash 
Crash” on investors in ETFs – and what steps we can take to prevent such market 
disruptions in the future. 
As the members of this committee know well, ETFs have become widely accepted 
investment vehicles for both institutional and retail investors. There are currently 985 
exchange traded products available in the US market with $797 billion in assets invested. 
They represent 30% of the total volume traded on national exchanges and they have 
become indispensable tools for a range of investment strategies. Institutional investors 
use them for a number of sophisticated strategies such as cash equitization or as a low-
cost hedging tool. For their part, retail investors also use them in a wide variety of ways: 
to build an asset allocation, as part of a core/satellite approach, or tactical investing 
among sectors, to name a few. With their low costs, transparency and easy access to a 
wide range of asset classes, ETFs have significant advantages that have benefited 
millions of investors. For example, many investors, both retail and institutional, find 
enormous value in being able to observe the price of the ETF during the day, and to use 
trade type orders such as stop-loss or limit orders in an attempt to control the price at 
which they transact. 
Against this backdrop, several market issues converged on May 6
th
 to affect prices for US 
equities in general, and ETFs holding US equities specifically, for a period of 
approximately ½ hour during the afternoon’s trading. We note that ETFs holding US 
fixed-income securities and non-US equities were largely unaffected and generally traded 
at prices within normal ranges of underlying asset values.  Many ETFs holding US 
equities, however, did not. In our view, four different factors simultaneously contributed 
to market prices for some ETFs diverging from underlying asset value. First, there was a 
sudden market freefall in US equity prices, which preceded the fall in ETF prices and 
caused market makers in ETFs that seek to track benchmarks heavy in the falling stocks 
to have difficulty valuing the ETF’s underlying assets. Second, anxiety over potential 
trade cancellations caused liquidity providers to fear that normal ETF hedging strategies 
would be interrupted, which caused them to pull back from bidding for ETFs. Third, 
there was market fragmentation where exchange protocols and order routing rules 
increased selling pressure. And finally, there was unintended selling because stop-loss 
orders were triggered, which increased the volume of sell orders on ETFs. These stop-
loss orders, which turned into orders to sell at “market” prices, were executed 
significantly below trigger points due to the speed of price freefall. 
1
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
While we believe the final impact on investors was relatively limited due to widespread 
trade cancellations, there was nonetheless an impact. To better understand exactly the 
effect on financial advisors, we at BlackRock’s iShares ETF business recently 
commissioned a survey of 380 retail financial advisors in late June. We commissioned 
the ‘Flash Crash’ Perceptions Study to learn from financial advisors, one of the largest 
groups of ETF users, what they think about the market event that affected individual 
securities and ETFs as a category. The survey revealed that the majority of advisors were 
minimally impacted by the market disruption, and they believe that market structure 
issues, such as an overreliance on computer systems and some types of high frequency 
trading, were the primary drivers of the crash. Stop-loss orders, market makers and 
exchange routing issues were seen as secondary issues. As it relates to the macro 
economic environment, the majority of advisors surveyed expect current market volatility 
will either increase or remain at today’s level over the next six months. Furthermore (and 
perhaps disappointingly), those surveyed anticipate an event similar to May 6
th
 will likely 
occur again, no matter what solutions are adopted. The survey also indicated that most 
advisors’ accounts were not impacted by the events of May 6
th
. Of those account touched 
by the volatile trading on that day, the most common cause was a stop-loss order 
triggered by the “Flash Crash” and executed at a significantly reduced value, which 
happened to about a quarter of the advisors surveyed. 
Regardless of the cause of volatility – economic or structural like the “Flash Crash” – 
advisors identified ETFs as the best investment vehicles to navigate a volatile market 
environment followed by bonds and mutual funds.  
The survey findings underscore for us at iShares the importance of strong market 
structure reforms to help prevent future market disruptions. We believe those reforms 
should include: 
	 Uniform “circuit breakers” for stocks and ETFs across all exchanges; 
	 Making exchange trade error cancellation rules less arbitrary and more transparent 
in a manner that does not discourage liquidity providers from providing liquidity 
at times of market stress; 
	 Clearer guidelines for inter-market order routing rules; 
	 Replacing “stop loss” orders with “stop loss limit” orders to specify a limit price; 
and 
	 Expanding the role of lead market makers to ensure orderly market functioning. 
We believe these reforms would represent a strong step towards preventing market 
disruptions like the one of May 6
th
 in the future. We at BlackRock look forward to 
working together with the members of this committee and the staffs of the SEC and 
CFTC on this important issue. Thank you again for the opportunity to speak today. 
2 

 
 
 
 
 
  
 
 
“Flash Crash” Perceptions Study
	
Following the events of May 6, 2010 (commonly referred to as the “Flash Crash”), iShares commissioned a 
study through Market Strategies International to understand financial advisors’ perceptions of and reac-
tions to the extreme market volatility, and the role the market structure played in the crash. 
Additionally, the survey gauged financial advisors’ confidence in Exchange Traded Funds (ETFs) during 
market volatility. 
Market Volatility – Overall Perceptions 
Over the next 6 months, one-third of advisors surveyed expect market volatility to increase; more than 
half expect it to remain the same. 
• More than 1-in-3 advisors (36 percent) expect market volatility to increase. 
• More than half (56 percent) expect volatility to stay the same over the next six months.  
• Less than 10 percent of those surveyed believe that volatility will decrease. 
In volatile markets, the top 3 investment products identified by financial advisors were ETFs, bonds and 
mutual funds. 
• Overall, 54 percent of those surveyed identified ETFs as the top investment product to use in a  
   volatile market, followed by bonds (49 percent) and mutual funds (46 percent). 
• 68 percent of Independent Registered Advisors (RIAs) would use ETFs over other investment  
   vehicles in a volatile market, whereas 44 percent of wirehouse and regional broker-dealers said  
   they would use ETFs over other investment vehicles. 
In volatile markets, financial advisors surveyed felt the most important investment product attributes 
are: diversification (64 percent), precise exposure to targeted asset classes (45 percent) and intraday 
liquidity (43 percent). 

  
 
          
     
     
 
 
 
 
 
     
     
     
     
 
Contributing Factors to the “Flash Crash” 
Overreliance on computer systems and high-frequency trading were cited as primary contributors to the May 6 
volatility. 
• More than 4-in-5 advisors believe that the overreliance on computer systems (85 percent) and  
   high-frequency trading (83 percent) contributed to the May 6 volatility. 
• 56 percent surveyed believed overreliance on computer systems was the biggest  
contributor to the volatility on May 6. 
• 46 percent believed high-frequency trading was the biggest contributor. 
Financial advisors viewed the use of stop-loss orders, market makers, and exchange routing issues as secondary 
factors that contributed to the Flash Crash. 
• Use of stop-loss orders (23 percent) 
• Market makers (21 percent) 
• Exchange routing issues (18 percent) 
“Flash Crash Impact” 
The most common account impact on May 6 was the triggering of a stop-loss order by the crash. 
• 28 percent of advisors had a stop-loss order triggered by the crash at a significantly reduced value. 
Stop-loss and reversed stock trades were twice as likely to occur in non-discretionary accounts (23 percent) than 
discretionary accounts (11 percent). 
Contrary to initial media reports, the majority of advisors surveyed said their accounts were minimally impacted. 
• More than 8-in-10 advisors surveyed said each of the following did not occur in their accounts: 
• ETF trade reversed 
• Stock trade reversed 
• Loss of stock or fund 
• Gain of stock or fund 
The “Flash Crash” minimally affected the use of stop-loss and market orders among advisors - 63 percent and 77 
percent respectively say that usage of them will stay the same. 
ETF trade reversals were the least common account impact (12 percent) of the issues tested in the survey. 

 
     
     
  
 
 
 
 
 
 
 
 
“Flash Crash” Response & Solutions 
In response to the flash crash, advisors most favored clearer inter-market routing guidelines (83 percent) and 
uniform circuit breakers (80 percent). 
• Three-in-four advisors also favor: 
• Trading audits (76 percent) 
• Expanding the role of lead market maker (76 percent) 
More than a third of financial advisors surveyed strongly oppose prohibition of stop-loss orders. 
• Nearly 1-in-2 advisors feel that some preventative steps have been taken, although similar events are  
   likely to happen.* 
• Nearly 3-in-4 advisors believe similar events will happen irrespective of what steps have been taken.* 
Role of Information Sources on “Flash Crash” Perceptions 
Following the Flash Crash, internal resources were viewed as helpful to both advisors’ and their clients’ under-
standing of the event. 
• Nearly 1-in-2 advisors felt that their firm’s resources increased understanding. 
• Two-in-three felt that their firm’s resources increased clients’ understanding. 
Financial Advisors felt external sources, particularly media, increased their personal confusion surrounding the 
Flash Crash. 
• Half of the advisors (49 percent) felt the media added to their confusion. 
• 32 percent felt the SEC or other government bodies increased their confusion. 
Financial advisors felt that their clients’ confusion was greatly impacted by external sources. 
• 66 percent of advisors said the media increased confusion among their clients. 
Methodology 
The online survey was conducted by Market Strategies International between June 23, 2010 - June 29, 2010 among 
380 retail advisors throughout the United States. While iShares sponsored the research and provided the sample, 
they were not revealed as the sponsor of the research. 
Survey respondents were required to manage assets totaling $25 million or more and provide investment advice to 
individual investors and they are personally responsible for making investment product recommendations to 
individual investors. Those surveyed have used or managed passive ETFs within the past six months, and were 
comprised of iShares clients and those who use other providers. 
*At the time the survey was given, the SEC had implemented stock-by-stock circuit breakers to halt trading for five minutes in any stock that experiences a 
move of 10 percent or more from its last good sale. 
© 2010 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, 
servicemarks or registered trademarks are the property of their respective owners. iS-3142-0820 

Remarks Prepared for Delivery 

CFTC-SEC Advisory Committee on Emerging Regulatory Issues 


August 11, 2010 

Noel Archard 


Managing Director 

BlackRock 


Good morning. My name is Noel Archard -- I’m a Managing Director at BlackRock and I 
head the Product Team for the US exchange-traded fund (ETF) business. I greatly 
appreciate the opportunity to speak with you today about the impact of the May 6th “Flash 
Crash” on investors in ETFs – and what steps we can take to prevent such market 
disruptions in the future. 

As the members of this committee know well, ETFs have become widely accepted 
investment vehicles for both institutional and retail investors. There are currently 985 
exchange traded products available in the US market with $797 billion in assets invested. 
They represent 30% of the total volume traded on national exchanges and they have 
become indispensable tools for a range of investment strategies. Institutional investors 
use them for a number of sophisticated strategies such as cash equitization or as a low-
cost hedging tool. For their part, retail investors also use them in a wide variety of ways: 
to build an asset allocation, as part of a core/satellite approach, or tactical investing 
among sectors, to name a few. With their low costs, transparency and easy access to a 
wide range of asset classes, ETFs have significant advantages that have benefited 
millions of investors. For example, many investors, both retail and institutional, find 
enormous value in being able to observe the price of the ETF during the day, and to use 
trade type orders such as stop-loss or limit orders in an attempt to control the price at 
which they transact. 

Against this backdrop, several market issues converged on May 6th to affect prices for US 
equities in general, and ETFs holding US equities specifically, for a period of 
approximately ½ hour during the afternoon’s trading. We note that ETFs holding US 
fixed-income securities and non-US equities were largely unaffected and generally traded 
at prices within normal ranges of underlying asset values.  Many ETFs holding US 
equities, however, did not. In our view, four different factors simultaneously contributed 
to market prices for some ETFs diverging from underlying asset value. First, there was a 
sudden market freefall in US equity prices, which preceded the fall in ETF prices and 
caused market makers in ETFs that seek to track benchmarks heavy in the falling stocks 
to have difficulty valuing the ETF’s underlying assets. Second, anxiety over potential 
trade cancellations caused liquidity providers to fear that normal ETF hedging strategies 
would be interrupted, which caused them to pull back from bidding for ETFs. Third, 
there was market fragmentation where exchange protocols and order routing rules 
increased selling pressure. And finally, there was unintended selling because stop-loss 
orders were triggered, which increased the volume of sell orders on ETFs. These stop-
loss orders, which turned into orders to sell at “market” prices, were executed 
significantly below trigger points due to the speed of price freefall. 

1
 



 

 

 
 

 
 

 
 

 
 

 

 
 

 

While we believe the final impact on investors was relatively limited due to widespread 
trade cancellations, there was nonetheless an impact. To better understand exactly the 
effect on financial advisors, we at BlackRock’s iShares ETF business recently 
commissioned a survey of 380 retail financial advisors in late June. We commissioned 
the ‘Flash Crash’ Perceptions Study to learn from financial advisors, one of the largest 
groups of ETF users, what they think about the market event that affected individual 
securities and ETFs as a category. The survey revealed that the majority of advisors were 
minimally impacted by the market disruption, and they believe that market structure 
issues, such as an overreliance on computer systems and some types of high frequency 
trading, were the primary drivers of the crash. Stop-loss orders, market makers and 
exchange routing issues were seen as secondary issues. As it relates to the macro 
economic environment, the majority of advisors surveyed expect current market volatility 
will either increase or remain at today’s level over the next six months. Furthermore (and 
perhaps disappointingly), those surveyed anticipate an event similar to May 6th will likely 
occur again, no matter what solutions are adopted. The survey also indicated that most 
advisors’ accounts were not impacted by the events of May 6th. Of those account touched 
by the volatile trading on that day, the most common cause was a stop-loss order 
triggered by the “Flash Crash” and executed at a significantly reduced value, which 
happened to about a quarter of the advisors surveyed. 

Regardless of the cause of volatility – economic or structural like the “Flash Crash” – 
advisors identified ETFs as the best investment vehicles to navigate a volatile market 
environment followed by bonds and mutual funds.  

The survey findings underscore for us at iShares the importance of strong market 
structure reforms to help prevent future market disruptions. We believe those reforms 
should include: 

	 Uniform “circuit breakers” for stocks and ETFs across all exchanges; 

	 Making exchange trade error cancellation rules less arbitrary and more transparent 
in a manner that does not discourage liquidity providers from providing liquidity 
at times of market stress; 

	 Clearer guidelines for inter-market order routing rules; 

	 Replacing “stop loss” orders with “stop loss limit” orders to specify a limit price; 
and 

	 Expanding the role of lead market makers to ensure orderly market functioning. 

We believe these reforms would represent a strong step towards preventing market 
disruptions like the one of May 6th in the future. We at BlackRock look forward to 
working together with the members of this committee and the staffs of the SEC and 
CFTC on this important issue. Thank you again for the opportunity to speak today. 

2 



 
 
 

 
 
  
 
 

“Flash Crash” Perceptions Study
	
Following the events of May 6, 2010 (commonly referred to as the “Flash Crash”), iShares commissioned a 
study through Market Strategies International to understand financial advisors’ perceptions of and reac-
tions to the extreme market volatility, and the role the market structure played in the crash. 

Additionally, the survey gauged financial advisors’ confidence in Exchange Traded Funds (ETFs) during 
market volatility. 

Market Volatility – Overall Perceptions 

Over the next 6 months, one-third of advisors surveyed expect market volatility to increase; more than 
half expect it to remain the same. 

• More than 1-in-3 advisors (36 percent) expect market volatility to increase. 
• More than half (56 percent) expect volatility to stay the same over the next six months.  
• Less than 10 percent of those surveyed believe that volatility will decrease. 

In volatile markets, the top 3 investment products identified by financial advisors were ETFs, bonds and 
mutual funds. 

• Overall, 54 percent of those surveyed identified ETFs as the top investment product to use in a  
   volatile market, followed by bonds (49 percent) and mutual funds (46 percent). 
• 68 percent of Independent Registered Advisors (RIAs) would use ETFs over other investment  
   vehicles in a volatile market, whereas 44 percent of wirehouse and regional broker-dealers said  
   they would use ETFs over other investment vehicles. 

In volatile markets, financial advisors surveyed felt the most important investment product attributes 
are: diversification (64 percent), precise exposure to targeted asset classes (45 percent) and intraday 
liquidity (43 percent). 



  
 
    
  
  

 
 
 

 

 
  
  
  
  

 

Contributing Factors to the “Flash Crash” 

Overreliance on computer systems and high-frequency trading were cited as primary contributors to the May 6 
volatility. 

• More than 4-in-5 advisors believe that the overreliance on computer systems (85 percent) and  
   high-frequency trading (83 percent) contributed to the May 6 volatility. 

• 56 percent surveyed believed overreliance on computer systems was the biggest  
contributor to the volatility on May 6. 
• 46 percent believed high-frequency trading was the biggest contributor. 

Financial advisors viewed the use of stop-loss orders, market makers, and exchange routing issues as secondary 
factors that contributed to the Flash Crash. 

• Use of stop-loss orders (23 percent) 
• Market makers (21 percent) 
• Exchange routing issues (18 percent) 

“Flash Crash Impact” 

The most common account impact on May 6 was the triggering of a stop-loss order by the crash. 
• 28 percent of advisors had a stop-loss order triggered by the crash at a significantly reduced value. 

Stop-loss and reversed stock trades were twice as likely to occur in non-discretionary accounts (23 percent) than 
discretionary accounts (11 percent). 

Contrary to initial media reports, the majority of advisors surveyed said their accounts were minimally impacted. 
• More than 8-in-10 advisors surveyed said each of the following did not occur in their accounts: 

• ETF trade reversed 
• Stock trade reversed 
• Loss of stock or fund 
• Gain of stock or fund 

The “Flash Crash” minimally affected the use of stop-loss and market orders among advisors - 63 percent and 77 
percent respectively say that usage of them will stay the same. 

ETF trade reversals were the least common account impact (12 percent) of the issues tested in the survey. 



 
  
  

  
 
 

 
 
 

 
 

 

“Flash Crash” Response & Solutions 

In response to the flash crash, advisors most favored clearer inter-market routing guidelines (83 percent) and 
uniform circuit breakers (80 percent). 

• Three-in-four advisors also favor: 
• Trading audits (76 percent) 
• Expanding the role of lead market maker (76 percent) 

More than a third of financial advisors surveyed strongly oppose prohibition of stop-loss orders. 
• Nearly 1-in-2 advisors feel that some preventative steps have been taken, although similar events are  
   likely to happen.* 
• Nearly 3-in-4 advisors believe similar events will happen irrespective of what steps have been taken.* 

Role of Information Sources on “Flash Crash” Perceptions 

Following the Flash Crash, internal resources were viewed as helpful to both advisors’ and their clients’ under-
standing of the event. 

• Nearly 1-in-2 advisors felt that their firm’s resources increased understanding. 
• Two-in-three felt that their firm’s resources increased clients’ understanding. 

Financial Advisors felt external sources, particularly media, increased their personal confusion surrounding the 
Flash Crash. 

• Half of the advisors (49 percent) felt the media added to their confusion. 
• 32 percent felt the SEC or other government bodies increased their confusion. 

Financial advisors felt that their clients’ confusion was greatly impacted by external sources. 
• 66 percent of advisors said the media increased confusion among their clients. 

Methodology 

The online survey was conducted by Market Strategies International between June 23, 2010 - June 29, 2010 among 
380 retail advisors throughout the United States. While iShares sponsored the research and provided the sample, 
they were not revealed as the sponsor of the research. 

Survey respondents were required to manage assets totaling $25 million or more and provide investment advice to 
individual investors and they are personally responsible for making investment product recommendations to 
individual investors. Those surveyed have used or managed passive ETFs within the past six months, and were 
comprised of iShares clients and those who use other providers. 

*At the time the survey was given, the SEC had implemented stock-by-stock circuit breakers to halt trading for five minutes in any stock that experiences a 
move of 10 percent or more from its last good sale. 

© 2010 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, 
servicemarks or registered trademarks are the property of their respective owners. iS-3142-0820 


	iShares_Flash_Crash_Survey_Results_FINAL.pdf
	iShares_Survey Results1
	iShares_SurveyResults2.pdf
	iShares_SurveysResults3