Since the 2008 global financial crisis (GFC) exchange traded funds (ETFs) have experienced remarkable growth. A recent Bloomberg report pegs the worldwide ETF market at over $5.3 trillion (up from $700 billion pre-GFC) with the U.S. accounting for nearly 70 percent of its size. The number of available products has grown exponentially. Product variety seems limited only by one’s imagination and extends beyond indices to novel concepts (like video-gaming and e-sports, consumer discretionary, commodity factoring, and women in leadership). It also includes trading or operational strategies like leveraged products, synthetics, directional (inverse funds), and ETFs that have no underlying economic interest at all – like volatility products. ETFs are exclusive of a more complex (and opaque) world of exchange-traded products (ETPs) that trade on exchanges and may operate as a company, commodity pool, grantor trust, or unsecured debt. The fuel for ETF growth is diverse. With lower fees, secondary market intra-day trading, instant diversification, and tax advantages, many retail investors see them as an upgrade from mutual funds. Some suggest that post-GFC regulatory requirements of banks to “shed large inventories to bolster their balance sheets” has contributed to market growth, as well as the ability to execute (with little friction) hedge or speculative trades – including exposure to illiquid underlying assets. Also contributing to growth is the easy replication potential for profitable structures – which can take on viral properties.
However, growth in the ETF market may be a cause for concern (or at least a signal for more intensive inquiry). Independent of the fact that ETFs lack a unified regulatory framework or a standardized naming convention in the U.S., ETF growth has been recently associated with a myriad of potential risks and externalities including complexity, opacity and contagion risk, counterparty and collateral risk for synthetics, and price and information inefficiency for underlying assets. They may also pose systemic risks since they extend the “financial intermediation chain.” There are also lingering questions about their impact on financial stability given their peculiar behavior during periods of market distress in 2010, 2015, and 2018. Also, there are concerns about “issuer concentration” (three ETF sponsors – Blackrock, Vanguard and State Street account for over 83% of the U.S. market) and equity ownership concentration (including from industry founder John Bogle) since ETF ownership of U.S. equities will, in the near future, cross the 50 percent threshold.
Yet the most frequently cited concern in the ETF market is that it creates a “liquidity illusion” that could easily disappear in the context of a crisis – exposing investors to significant loses and an inability to sell their shares. This article will explain how that could happen; what lessons the failure of the auction rate securities market provides when relying on discretionary liquidity or implicit guarantees; the ETF liquidity counter-arguments from industry and impact of liquidity safeguards by the Securities & Exchange Commission (“SEC”); and the reasons why liquidity in the ETF market is a worthwhile development to monitor.
Whispers of Liquidity Danger In The ETF Arbitrage Mechanism
The Depository Trust & Clearing Corporation (America’s largest post trade infrastructure provider), in a recent white paper assessing future threats to financial stability, called growth in the ETF market, and its liquidity dynamics, “two of the most significant post-crisis evolutions that could be potential sources of systemic market-related risks.” Several fund managers have also shared this sentiment. In order to appreciate these concerns, one must understand the operational dynamics of an ETF. While they are often compared to mutual funds, ETFs are significantly different because of an “arbitrage mechanism” that exists between a primary and a secondary market. Professors Henry T. C. Hu and John D. Morley (who recently proposed the first unified regulatory framework for the U.S. ETF market) have described this dynamic as a “novel, theory driven device” that is also the “defining characteristic” of an ETF since “it is absent from the market microstructure of all other traded securities and from the ETF’s closest cousins, the mutual fund and the closed end fund.”
A simple ETF (often called a “plain vanilla”) is created when an “authorized participant” or “AP” (a financial institution or market specialist) transfers, in kind, a basket of securities to an ETF plan sponsor (like BlackRock or Vanguard, who publishes the basket list in advance) and in exchange the AP receives new ETF shares (called “creation units”). This is the “primary market”, where the total number of ETF shares is flexible, and retail investors do not transact. Once in possession of new ETF shares, APs sell them to market makers and into exchanges (the “secondary market”) where retail and institutional investors purchase them for portfolio diversification. Supply and demand for additional ETF creations (or redemptions) originates in the secondary market based on buy/sell order imbalances. ETF redemptions occur in a reverse process (ETF shares are purchased by APs from exchanges or market makers and then transferred to ETF plan sponsors in exchange for the basket of securities, or cash – if the ETF is cash redeemable). The “arbitrage mechanism” is a way to ensure that ETF prices in the secondary market align with the net asset value (NAV) of the underlying basket of securities held by the fund sponsor. For example, if an ETF’s shares are trading at a discount to NAV then APs have an incentive to redeem the ETF shares for the more valuable basket of securities. Effective arbitrage (which relies on the voluntary actions of APs) is a fundamental regulatory consideration in the SEC’s ETF approval process.
Liquidity measures the extent that a security can be traded without affecting its price. Liquidity in ETFs is relevant at the secondary market level (displayed liquidity), market-maker inventory level (non-displayed secondary liquidity), the ETF primary market (APs transacting with ETF sponsors through redemptions and creations) and liquidity in the actual underlying securities. Some fear that a breakdown in the arbitrage mechanism could lead to a “liquidity mismatch” in a crisis scenario between the underlying securities (that comprise the fund) and the fund shares. Such mismatch could stimulate a “spillover” effect on other asset classes, as investors who cannot obtain ETF liquidity are forced to liquidate other assets (thus spreading the “liquidity pressure” into other market segments.) Also, it could “amplify” liquidity pressure in either direction (towards the underlying securities or the ETF units themselves) through what’s been described as a “feedback loop” that drives prices downward even further.
Implicit Liquidity Guarantees and The ETF “Death Spiral”
The ETF market could be a case of “it works until it doesn’t” and there are growing concerns that the arbitrage mechanism wasn’t “designed for a large market sell-off.” Consider a crisis scenario where selling pressure causes underlying assets (like fixed income securities) to become illiquid and rapidly lose value prompting ETF holders to quickly sell their shares. Here market makers and APs would likely widen their bid-ask spreads to “compensate for market volatility and pricing errors.” Increased fund redemptions in the primary market could also detrimentally change the composition of the underlying portfolio basket causing APs – who no longer want to redeem ETF shares and receive, in-kind, the plummeting and illiquid securities – to withdraw from the market altogether. Hedge fund Black Bear Value Partners recently disclosed that it’s been “borrowing shares and stockpiling bearish options” under a belief that ETFs (especially fixed incomes) are a “ticking time bomb.” Fixed income ETFs, under such a scenario, could fall into a “death spiral” once healthy portions of the fund are liquidated leaving only “distressed and illiquid notes”, which inevitably would stimulate an ETF fire sale in the secondary market.
Detractors believe that, in a crisis scenario, the arbitrage mechanism could break down, causing the ETFs to trade like a closed end fund, the withdrawal of liquidity support in the secondary market by market makers and APs, and the spread widening between the ETF share price and its NAV. Simply put – market participants, counterparties or “facilitators” who normally provide liquidity support could back out of the market in a panic leaving investors with illiquid plummeting securities (like the credit market during the GFC). Also, short-term ETF sellers (like high frequency traders) would likely be the largest (and fastest) participants to liquidate their initial positions, making it difficult for other investors to sell without taking significant losses. Essentially there is a liquidity “illusion” since certain ETFs (like junk bond funds) are much more liquid than the underlying securities; however, if the market crashes, and underlying liquidity evaporates, those same ETF holders will have a difficult time unloading their shares. The logic in this proposition is rather straight forward: it is impossible to provide long-term liquidity in a fund that holds illiquid assets unless, as the trading blog Seeking Alpha recently noted, there is an “intervening mechanism that allows participants to arb away disconnects”. The intervening mechanism in the ETF market is provided by APs; however, it is discretionary and market based, not legally obliged. As will be shown in the next section discretionary liquidity cannot always be relied on.
The primary ETF sectors that have been cited as problematic are corporate and high yield bond funds given the increasing size, and institutional exposure, of the fixed income ETF market, the “challenges in trading, liquidity and security sourcing” of individual bonds, and the fact that fixed income ETFs are seen as a frictionless substitute for otherwise illiquid fixed income products. Liquidity illusions in ETFs have also been citied as a concern in the equity ETFs sector and Societe Generale SA recently disclosed results from a liquidity fragility stress test of 16,000 stocks, suggesting several ETFs were exposed to secondary market liquidity risks given their large holdings of particularly vulnerable equities. This concern has also been recently noted for ETFs investing in leveraged loans.
Discretionary Liquidity and the Failure of Auction Rate Securities
ETF liquidity is reliant on market makers and APs being incentivized to provide it. Such incentives are market based, not contractual. To create or redeem shares an AP enters into an “authorized participant agreement” or “APA” with an ETF sponsor (for a specific offering or a master agreement for any plan sponsored fund) but the sponsor does not compensate the AP directly. Most importantly, an AP does not have a legal (or fiduciary) obligation to create or redeem ETF shares.  APs profit by either acting as dealers or market makers in the secondary market (earning the bid-ask spread and profiting off arbitrage opportunities), or taking fees as “clearing brokers” where they are paid for “processing creations and redemptions as an agent for a wide array of market participants such as investment advisers and various liquidity providers, including market makers, hedge funds, and proprietary trading firms.” Further, an individual ETF sponsor will enter into many APAs with various APs with large funds having the most agreements in place.
The ETF market’s reliance on discretionary liquidity may cause market historians to recall the Auction Rate Security (“ARS”) failure in 2008. An ARS is a variable or adjustable rate bond, often issued by a municipality, student loan finance authority or corporation, with a rate set, and periodically adjusted, through a Dutch Auction. ARSs were attractive because they offered long-term borrowing at short-term floating rates. Investors wishing to sell supplied their ARS to an auction, where buyers (who viewed ARS as a substitute for money market funds) submitted bids in a competitive process, stating the amount they were willing to purchase and the lowest interest rate they were willing to accept. At the close of the auction the “clearing rate” (the rate all investors would receive until the next auction) was set with investor bids placed above this rate not filled.
In 2008, in what’s been described as a “prelude to the mortgage crisis” auctions to reset the ARS rates failed as major financial institutions – who ran the auctions and were relied on to provide liquidity support – withdrew, leaving a wide supply of nearly worthless ARS. An ARS auction fails when there are “insufficient bidders to cover the number of securities offered for sale” This is exactly what happened as liquidity providers (auction dealers) withdrew from the market – failing to make good on their “implicit” guarantee that they would intervene to ensure auction success – leaving issuers unable to reset rates (and also subject to penalties), and investors holding now illiquid (and devalued) securities they once thought were like cash. Banks withdrawing from the market were exposed to significant credit losses and mortgage write-downs at the time and thus “less willing to commit their money to supporting auctions in danger of failing.” The ARS failure resulted in settlements of over $50 billion to aggrieved investors who alleged the products, and liquidity risks, were not adequately described (or misleading) in the disclosure documentation.
Of note, the ARS market failure is not exclusively attributed to discretionary liquidity pullback. One study has linked the market failure to maximum auction rates that were below the bond’s implied market clearing rate and also states that participants priced ARS above money market funds, treasury bills and certificates of deposit (to compensate for the possibility of auction failure). Nevertheless, there is an interesting parallel worth investigating in the ETF market. Just as secondary market ETF investors rely on APs providing discretionary liquidity, and ensuring effective arbitrage to bridge the spread between the ETF share price and the NAV, so to did ARS investors rely on the provision of discretionary (and market incentivized) liquidity from auction dealers. When this discretionary liquidity support evaporated the market crumbled.
The Pro-Liquidity Counter-Arguments & The SEC’s Liquidity Safeguards
Liquidity illusions in the ETF market are hotly contested. Large swaths of industry respondents in ETF liquidity surveys have expressed trust in the market’s liquidity and the likelihood of other APs to step in to take the place of those who withdraw. BlackRock, who has an obvious interest in a safe and healthy market perception, believes that the risks are overblown, and the aforementioned Societe Generale SA study relies on assumptions that don’t reflect “historic behavior of investors or ETFs.” In a 2017 primer on the role of APs BlackRock posited that a systemic AP pullout is highly unlikely because other APs would enter if an arbitrage opportunity presented itself. There is also evidence (the case of Knight Trading Group in 2012, and Citigroup in 2013) of large APs withdrawing liquidity support and other APs, or registered market makers (who were not APs), stepping up to take their place.
Another safeguard, in the context of a liquidity mismatch crisis, is the ability of ETF sponsors to tap credit lines, and use cash to cover redemptions, in “the hope that volatility subsides and underlying assets can be sold at more reasonable, reliable prices later on.” The use of a credit facility to manage investor redemptions has been noted as a mitigant by the Financial Stability Board to address liquidity vulnerability. However, the use of more leverage to subside a panic is a very risky proposition. More importantly, most ETFs are not cash redeemable, but rather transfer the underlying securities “in-kind” to the AP. This point has been cited by market participants as a rebut to the liquidity illusion arguments (however it doesn’t eliminate the “death spiral” risk of AP market withdraw as previously noted).
It is also possible (but easy to be cynical) that investors will manage their own liquidity exposures by closely scrutinizing the liquidity of the underlying securities prior to investing in an ETF. Further, a recent survey undertaken by the International Organization of Securities Commission (“IOSCO”) noted that respondents downplayed the proposition that ETFs were riskier than conventional mutual funds – even in the event of an AP liquidity withdrawal – given the secondary market trading and in-kind redemption mechanisms. The report also suggested that “the best line of defense against a liquidity mismatch” is with the ETF itself to establish prudent liquidity management tools and practices.
In 2016, the SEC adopted rule 22e-4, and a new disclosure form (N-PORT), requiring liquidity risk management programs for open-ended funds including ETFs, with monthly and annual reporting, liquidity classification requirements for portfolio holdings, and liquid investment minimums – all aimed at providing more transparency, investor protection, and ensuring funds can meet shareholder redemptions. The rules also set out restrictions on the amount of illiquid investments an ETF can purchase. They also require ETFs to consider “liquidity cost to the authorized participant or other market participant, which could increase the cost of their participation and interfere with their role in the ETF arbitrage mechanism.” SEC Commissioner Michael Piwowar suggested earlier this year that some of the initial requirements may have had a negative effect on investors as the information was potentially misleading and lacked necessary context. As a result these rules were amended this summer to facilitate contextual analysis (for example the ETF’s annual shareholder report must provide “on an annual or semiannual basis a narrative discussion of the operation of the fund’s liquidity risk management program for the most recent fiscal year.”) Further, amendments were added to include cash balance disclosure and eliminate potential gaming behavior when funds classify their holdings into liquidity baskets. The amendments however have been criticized since they eliminated the need for funds to “publicly disclose the aggregate percentage of its investments assigned to each liquidity category.”
Conclusion And The Case For Continued Investigation
It remains to be seen whether these regulatory safeguards will be sufficient, whether investors will be able to effectively self-manage their risks, and the extent that industry leaders like BlackRock are correct that this is an overblown issue (perhaps some lingering post-traumatic liquidity stress from the GFC); or, whether the growing chorus of concerned voices sounding the liquidity mismatch and systemic risk alarm proves prescient. It is also uncertain whether liquidity disclosure will ultimately be effective, or whether we are moving into the arena of “too complex to depict” in financial innovation and engineering. Also, legal safeguards do not protect against a market-driven liquidity withdrawal – where financial intermediaries deem it to be in their economic best interest to voluntarily stop providing the “implicit” backing of discretionary liquidity that ETF investors have become accustomed to.
There are additional reasons to consider ETF market liquidity a worthwhile development to track. First, the GFC proved just how quickly liquidity crisis contagion (under parameters of information uncertainty) spreads across financial markets. Investor runs for liquidity can lead to rapid “self-fulfilling panics” that trigger a nearly simultaneous intermediary “coordination failure” (often driven by a first mover) and studies on the ARS market have highlighted this dynamic. In the ETF market there are large APs, and a “stress event” affecting these APs could have a material ripple throughout the ETF market. As such, a reliance on discretionary liquidity, in the context of a crisis is inherently “fragile” since dealers and market makers will stop providing it once they start incurring losses, or their balance sheets are negatively impacted from other exposures and they can no longer bear the additional risk from providing the liquidity support. Also, ETFs are administratively cheap and they may not have a “great tolerance for liquidity risk.” Further, when an AP is also acting as both a dealer / market maker and an arbitrageur, during a time of crisis, there is an inherent conflict which could lead to front running their own trades. Unfortunately, as is often the case with financial market innovations, we don’t know the full extent of the fragility until a crisis situation crystalizes significant losses. A potential regulatory reform in this regard would be to open up primary market access to holders of ETF shares who obtain them in the secondary market, if the arbitrage mechanism breaks down (a proposition beset with many obvious and practical complexities).
We know from experience that the ETF arbitrage mechanism has failed before – resulting in decreased liquidity and deviations between the ETF share price and its NAV. In February 2018, Inverse VIX ETFs traded at 18 times their NAV. Also, during the May 2010 flash crash, and again in August 2015, long exposure U.S. domestic equity ETFs suffered an arbitrage breakdown with similar mischief. If this market continues to grow (which seems nearly certain) it could fail again. The question is collateral damage – and whether regulatory and market safeguards are sufficient to contain the fallout to less than systemic proportions. Regulatory developments like the proposal set out by Professors Hu & Morley – requiring enhanced qualitative and quantitative disclosures – for the arbitrage mechanism (the key to the liquidity illusion allegation) are important to consider. Another consideration is the extent that ETF sponsors (given their concentration risk) should be considered “systemically important financial institutions”, and thus subject to more intensive regulatory oversight.
As the investor base for ETFs grows, it is also fair to wonder whether average investors will understand the liquidity complexities in their investment decisions and make a “realistic assessment of how ETFs will perform in stressed market conditions.” It is also reasonable to assess fund-marketing methods to scrutinize whether liquidity illusions are fostered. Further, while breakdown of the arbitrage mechanism and the “illusion” of liquidity are frequently cited concerns, they are not exclusive. Liquidity dynamics play into many “layers” of the ETF ecosystem including underlying (market) liquidity, primary and secondary trading, visible and “hidden” exchange liquidity, and off-exchange liquidity and further studies are warranted on the interaction effects between these layers and the possibilities for feedback loops or price distortions, especially as ETFs evolve away from broad indices and head further down the path of sectoral or strategic focus.
 For an analysis of growth in the global ETF market from 2003 to 2017 see Statista, Development of Assets of Global Exchange Traded Funds (ETFs) From 2003 to 2017, https://www.statista.com/statistics/224579/worldwide-etf-assets-under-management-since-1997/ (last visited November 29, 2018).
 See Rachel Evans & Carolina Wilson, How ETFs Became The Market, Bloomberg (Sept. 13, 2018), https://www.bloomberg.com/graphics/2018-growing-etf-market/.
 Id.; see also U.S. Securities and Exchange Commission, Request For Comment on Exchange-Traded Products, Release No.34-75165, File No. 27-11-15 (November 27, 2015) at 3 (“From 2006 to 2013, the total number of ETPs listed and traded as of year end rose by an average of 160 per year, with a net increase of more than 200 in both 2007 and 2011. By comparison, from 1993 to 2005, the total number of ETPs listed and traded as of year end rose by an average of just 17 per year, with a net increase of 60 in 2000.”)
 See Emily Zulz, VanEck Launches ETF Focused on Video Gaming, Esports: Portfolio Products, ThinkAdvisor (October 22, 2018), https://www.thinkadvisor.com/2018/10/22/vaneck-launches-etf-focused-on-video-gaming-esport/.
 See Nasdaq, Should You Invest In The First Trust Consumer Discretionary AlphaDEX Fund (FXD) (November 8, 2018), https://www.nasdaq.com/article/should-you-invest-in-the-first-trust-consumer-discretionary-alphadex-fund-fxd-cm1052437.
 See Business Wire, Blackrock Intends To Launch Factor-based Commodities Exchange Traded Products (Sept. 2, 2018), https://www.businesswire.com/news/home/20181102005352/en/BlackRock-Intends-Launch-Factor-based-Commodities-Exchange-Traded-Products.
 See ETF Database, Barclays Women In Leadership Total Return Index, http://etfdb.com/index/barclays-women-in-leadership-total-return-index/ (last visited September 27, 2018).
 See Kate Stalter, Why That Leveraged ETF Is A Bad Idea, Forbes (January 23, 2017), https://www.forbes.com/sites/katestalter/2017/01/23/why-that-leveraged-etf-is-a-bad-idea/#777632376ed2.
 See Sirio Aramonte, Cecilia Caglio & Tugkan Tuzun, Synthetic ETFs, FEDS Notes, Washington: Board of Governors of The Federal Reserve System (August 10, 2017), available at https://doi.org/10.17016/2380-7172.2028.
 See Rachel Evans & Carolina Wilson, Is This The Markets Latest Problem Child? Bloomberg (February 8, 2018), https://www.bloomberg.com/news/articles/2018-02-08/spotlight-turns-to-etf-problem-children-after-volatility-blow-up.
 See Exchange Traded Fund Data Base, Volatility ETFs, https://etfdb.com/etfdb-category/volatility/ (last visited November 29, 2018).
 See Martin Small, Don’t Confuse ETFs with ETPs, Business Insider (February 11, 2018), https://www.businessinsider.com/dont-confuse-etfs-with-etps-2018-2.
 See Barron’s, “What Makes ETFs Tax Efficient?” (April 27, 2017), https://www.barrons.com/articles/sponsored/what-makes-etfs-tax-efficient-1493223526.
 See Ryan Vlastelica, ETFs shattered their growth records in 2017, MarketWatch (January 3, 2018), https://www.marketwatch.com/story/etfs-shattered-their-growth-records-in-2017-2017-12-11.
 See Evans & Wilson, supra note 10.
 See The Economist, Exchange-Traded Funds Become Too Specialized (April 27, 2017), https://www.economist.com/finance-and-economics/2017/04/27/exchange-traded-funds-become-too-specialised.
 See Noah Smith, It’s Smart To Worry About ETFs, Bloomberg Opinion (June 5, 2017), https://www.bloomberg.com/opinion/articles/2017-06-05/it-s-smart-to-worry-about-etfs.
 The regulatory framework for ETFs have been recently described by Professors Henry T.C. Hu and John D. Morley as a “regulatory backwater” and fitting into a series of independent “cubbyholes.” See Henry T.C. Hu & John Morley, A Regulatory Framework For Exchange Traded Funds, 91 S. Cal. L. Rev. 839 (2018). In this article the authors propose the first unified ETF regulatory framework for products that exhibit an “arbitrage function” between a secondary and primary market. To reduce the regulatory discretion, and fragmentation in the current ETF approval process the U.S. Securities & Exchange Commission has also recently proposed a simplified approval process for new funds. See U.S. Securities and Exchange Commission, SEC Proposes New Approval Process For Certain Exchange-Traded Funds (June 28, 2018), https://www.sec.gov/news/press-release/2018-118.
 See Depository Trust & Clearing Corporation, The Next Crisis Will Be Different: Opportunities To Continue Enhancing Financial Stability 10 Years After Lehman’s Insolvency, Industry White Paper (September 2018) at 13-14 (hereinafter “DTCC”).
 See CBI Discussion Paper, infra note 112 at 41-51.
 See Doron Israeli, Charles M.C. Lee & Suhas A. Sridharan, Is There A Dark Side To Exchange Traded Funds (ETFs) An Information Perspective, 22 Review of Accounting Studies 1048, 1048-1050 (2017).
 See Bank for International Settlements, Market Structures and Systemic Risks of Exchange-Traded Funds, (April 2011), available at https://www.bis.org/publ/work343.pdf; see also Stefano Battiston, Guido Caldarelli, Robert M. May, Tarik Roukny, & Joseph Stiglitz, The Price Of Complexity In Financial Markets, 113(36) Proceedings of the National Academy of Sciences of the United States of America, PNAS 10031, 10031-10036 (September 2016), available at https://doi.org/10.1073/pnas.1521573113; Kathryn Judge, Fragmentation Nodes: A Study in Financial Innovation, Complexity, and Systemic Risk, 64 Stan. L. Rev. 657 (2012).
 See Eva Su, Exchange Traded Funds (ETFs): Issues For Congress, Congressional Research Service, CRS Report R45318, 17-20 (September 24, 2018).
 Id. at 16.
 See John C. Bogle, Bogle Sounds A Warning on Index Funds, The Wall Street Journal (November 29, 2018), https://www.wsj.com/articles/bogle-sounds-a-warning-on-index-funds-1543504551?mod=trending_now_4.
 See Erin Arvedlund, John Bogle pens WSJ op-ed warning index funds becoming too big, The Philadelphia Inquirer (November 29, 2018), http://www2.philly.com/philly/business/john-bogle-vanguard-wsj-index-funds-blackrock-state-street-fidelity-20181129.html.
 See Depositary Trust & Clearing Corporation, http://www.dtcc.com (last visited November 29, 2018).
 See DTCC supra note 19 at 13-14.
 See Vesna Poljak, Fund Managers Believe Exchange Traded Funds Will Have A Role In The Next Crisis, Financial Review (Oct. 22, 2017), https://www.afr.com/markets/fund-managers-believe-etfs-will-have-a-role-in-the-next-crisis-20171021-gz5oay.
 See Su, supra, note 23 at 6.
 Hu & Morley, supra note 18 at 843.
 See Rochelle Antoniewicz & Jane Heinrichs, The Role and Activities of Authorized Participants of Exchange Traded Funds, Investment Company Institute Report (March 2015) at 1, available at https://www.ici.org/pdf/ppr_15_aps_etfs.pdf (“In addition, APs are U.S. registered self-clearing broker-dealers that can process all required trade submission, clearance, and settlement transactions on their own account, as well as full participating members of the National Securities Clearing Corporation and Depository Trust Company.”)
 See BlackRock, A Primer on ETF Primary Trading and the Role of Authorized Participants (March 2017), https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-etf-primary-trading-role-of-authorized-participants-march-2017.pdf.
 See Su, supra note 23 at 4-5.
 See BlackRock, supra note 33 at 2.
 See Hu & Morley, supra note 23 at 851.
 Id. at 852.
 See U.S. Securities & Exchange Commission, Proposed Rule 6c-11, https://www.sec.gov/rules/proposed/2018/33-10515.pdf.
 See Investopedia, Liquidity, https://www.investopedia.com/terms/l/liquidity.asp (last visited November 30, 2018).
 See Su, supra note 23 at 4-5.
 Id. at 10.
 See Ian Foucher & Kyle Gray, Exchange-Traded Funds: Evolution of Benefits, Vulnerabilities and Risks, Bank of Canada Financial System Review (December 2014) at 42 (“Authorized participants (APs) provide an essential market function that allows ETFs to derive some of their advantages over traditional mutual funds (e.g., greater liquidity and a share price that is closer to the value of the underlying assets). However, APs can also transmit liquidity shocks from the ETF to the underlying assets (and vice versa). As ETFs and the underlying market become more interconnected, a small liquidity shock originating in either the ETF or the underlying securities could be amplified through a feedback loop (via APs). This could result in a large liquidity shock and a reduction in price informativeness for both the ETF and the underlying market.”)
 See Natasha Doff, Hedge Fund Manager Stakes Own Cash on a Bet Against Credit ETFs, Bloomberg (November 5, 2018), https://www.bloomberg.com/news/articles/2018-11-05/hedge-fund-manager-stakes-own-cash-betting-credit-etfs-crumble.
 See Financial Stability Oversight Council, Update on Review of Asset Management Products and Activities (November 16, 2016) available at, https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
 See Doff, supra note 47.
 See Mike Bird, Could ETFs Fall Into A Liquidity Jam? The Wall Street Journal (March 21, 2018), https://www.wsj.com/articles/return-of-volatility-raises-liquidity-question-for-etfs-1521627574?mod=ITP_businessandfinance_0&tesla=y.
 See Joseph N. DiStefano, Will ETFs, their prices dependent on hedge fund billions, stay aligned in the next market panic? Minnesota Post Bulletin (November 28, 2018), https://www.postbulletin.com/news/business/will-etfs-their-prices-dependent-on-hedge-fund-billions-stay/article_af7bd54e-0ede-57c9-a3df-6a2308bcb93b.html.
 See David Thorpe, ETF Investors ‘Must Accept’ Liquidity Risk, FT Advisor (November 8, 2018), https://www.ftadviser.com/investments/2018/11/08/etf-investors-must-accept-liquidity-risk/.
 See David Tuckwell, Junk Bond ETFs are Being Sold Short En Masse, ETF Stream (Feburary 18, 2018), http://www.etfstream.com/data-snapshot/2955_junk-bond-etfs-are-being-short-sold-en-masse.
 Seeking Alpha, Presenting: The ‘New’ Doom Loop (February 20, 2019), https://seekingalpha.com/article/4148271-presenting-new-doom-loop.
 See Wolf Richter, Treacherous Times For Bond Funds Ahead, Wolf Street (November 29, 2018), https://wolfstreet.com/2018/11/29/potentially-treacherous-times-for-bond-funds-ahead/.
 See Lee Barney, Fixed-Income ETFs Used To Address Bond Market Issues, Plan Sponsor (September 19, 2018), https://www.plansponsor.com/fixed-income-etfs-used-address-bond-market-issues/.
 See Tautvydas Marciulaitis, ETF Liquidity Trap Will Get You, Seeking Alpha (July 26, 2017), https://seekingalpha.com/article/4090736-etf-liquidity-trap-will-get?page=2; see also Sonali Basak & Lananh Nguyen, Guggenheim’s Anne Walsh Sees Liquidity Mismatch in Passive Bond Funds, Bloomberg (January 30, 2018), https://www.bloomberg.com/news/articles/2018-01-30/guggenheim-s-walsh-sees-liquidity-mismatch-in-passive-bond-funds.
 See Yakob Peterseil, BlackRock Hits Back at SocGen’s Warning About the ETF Market, Bloomberg (September 11, 2018), https://www.bloomberg.com/news/articles/2018-09-11/blackrock-hits-back-at-socgen-alarm-over-etf-market-fragility.
 See Colby Smith, Who’s Buying Leveraged Loans Anyways? Financial Times (November 20, 2018), https://ftalphaville.ft.com/2018/11/20/1542706123000/Who-s-buying-leveraged-loans-anyways-/.
 For an example of an APA see Form of Proshares Trust II Authorized Participant Agreement, available at https://www.sec.gov/Archives/edgar/data/1415311/000119312508213746/dex43.htm.
 See Mara Shreck & Shelly Antoniewicz, ETF Basics: The Creation and Redemption Process And Why It Matters, ICI Viewpoint (January 19, 2012), https://www.ici.org/viewpoints/view_12_etfbasics_creation.
 See Hu & Morley, supra note 18 at 853.
 See Antoniewicz & Heinrichs, supra note 32 at 1.
 Id. at 2-4.
 Investopedia, Auction Rate Security – ARS, https://www.investopedia.com/terms/a/auction-rate-security.asp (last visited November 30, 2018).
 Marc L. Ross, The ARS Debacle: The Forgotten Crisis of 2008, CFA Institute, Enterprising Investor (January 31, 2017), https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/.
 See Jacqueline Doherty, Auction-Rate Securities: Still Frozen In Time, Barron’s (March 28, 2015), https://www.barrons.com/articles/auction-rate-securities-still-frozen-in-time-1427505026.
 See Adrian D’Silva, Haley Gregg & David Marshall, Explaining The Decline In The Auction Rate Securities Market, 236 Chicago Fed Letter 1, 2 (2008).
 Id. at 2.
 See Gerald J. Russello, The Rise of the Financial Economy, 2(3) American Affairs Journal (2018), available at https://americanaffairsjournal.org/2018/08/the-rise-of-the-financial-economy/.
 D’Silva et al. supra note 70 at 2.
 Ross, supra note 68.
 D’Silva et al. supra note 70 at 2.
 See U.S. Securities and Exchange Commission, Auction Rate Securities, SEC Press Releases and Related Documents Concerning Settlements, available at https://www.sec.gov/investor/ars.htm.
 See John J. McConnell & Alessio Saretto, Auction Failures and the Market for Auction Rate Securities, 97(3) Journal of Financial Economics 451 (2010); see also Baixiao Liu, John J. McConnell & Alessio Saretto, Why Did Auction Rate Bond Auctions Fail During 2007-2008? The Journal of Fixed Income 5 (2010).
 See Trevor Hunnicutt, Fund Industry Defends Bond ETFs to U.S. Regulators, Reuters (April 9, 2018), https://www.reuters.com/article/us-usa-sec-bonds/fund-industry-defends-bond-etfs-to-u-s-regulators-idUSKBN1HG2YZ.
 See CBI Feedback Statement, infra note 103 at 11.
 See BlackRock, supra note 33.
 Peterseil, supra note 60.
 See BlackRock, supra note 33 at 5-6.
 See Antoniewicz & Heinrichs, supra note 32 at 8, 11.
 See Ashley Lau & Michael Flaherty, ETF Companies Boost Bank Credit Lines Amid Liquidity Concern, Reuters (May 12, 2015), https://www.reuters.com/article/us-etfs-credit-expansion-insight/etf-companies-boost-bank-credit-lines-amid-liquidity-concern-idUSKBN0NY0A720150513.
 See Financial Stability Board, Policy Recommendations To Address Structural Vulnerabilities From Asset Management Activities (January 12, 2017), available at http://www.fsb.org/wp-content/uploads/FSB-Policy- Recommendations-on-Asset-Management-Structural-Vulnerabilities.pdf.
 See Bird, supra note 52.
 See Jennifer Ryan Woods, Experts Say Bond ETF Liquidity Concerns Are Overblow, Forbes (May 18, 2015), https://www.forbes.com/sites/jenniferwoods/2015/05/18/experts-say-bond-etf-liquidity-concerns-are-overblown/#38a2baa26091.
 See Su supra note 23 at 12.
 See Risk.Net, Institutional ETF Trading, Liquidity Improving, Trade Sizes Growing (Q4 2018), available at https://www.janestreet.com/static/pdfs/JaneStreet_Inst_ETF_Trading_Survey_2018.pdf?utm_source=website&utm_medium=download_button&utm_campaign=trading-survey-2018; see also John Manganaro, ETF Costs, Liquidity in Focus For Institutional Investors, Plan Sponsor (October 12, 2018), https://www.plansponsor.com/etf-costs-liquidity-focus-institutional-investors/.
 See The Board of the International Organization of Securities Commissions, Recommendations For Liquidity Risk Management For Collective Investment Schemes Final Report (February 2018) at 23-24, available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD590.pdf.
 Id. at 23.
 See U.S. Securities and Exchange Commission, SEC Adopts Rules To Modernize Information Reported By Funds, Require Liquidity Risk Management Programs and Permit Swing Programs (October 13, 2016), https://www.sec.gov/news/pressrelease/2016-215.html.
 See Sullivan & Cromwell LLP, SEC Proposes ETF Rule, Amends Liquidity Risk Reporting Rule and Requires InLine XBRL Reporting By Funds (July 11,2018), https://www.sullcrom.com/files/upload/SC-Publication-SEC-Proposes-ETF-Rule-Amends-Liquidity-Risk-Reporting-Rule-and-Requires-Inline-XBRL-Reporting-by-Funds.pdf.
 See CBI Discussion Paper, infra note 112 at 23.
 See U.S. Securities and Exchange Commission, Statement at Open Meeting On Investment Company Liquidity Disclosure (March 14, 2018), https://www.sec.gov/news/public-statement/statement-piwowar-open-meeting-fund-liquidity-2018-03-14.
 See U.S. Securities & Exchange Commission, Investment Company Liquidity Disclosure, Release No. IC-33142; File No. 27-04-18); See also Sullivan & Cromwell, supra note 91 at 9
 See Sullivan & Cromwell, supra note 91 at 9 (“The SEC further expressed concern that this could create incentives for funds to “classify investments as more liquid and … inappropriately highlight liquidity risk compared to other, potentially more salient risks of the fund.”)
 Id. at 9-11 (“At the open meeting held on June 28, 2018, the two Democratic Commissioners issued dissenting statements. Commissioner Kara M. Stein referred to the new rules as a “rollback of public disclosure” and commented that, in her view, the SEC should have first observed how the originally proposed framework, which had been unanimously approved, would have worked before eliminating the requirement for public disclosure of basic liquidity information to investors. Commissioner Stein also expressed displeasure at the notion of possibly moving to “a more principles-based approach” that may invite greater discretion in complying with the rules. Commissioner Robert J. Jackson, Jr. also commented that the adopted rules seemed to him to be based on “the bizarre claim that investors might find information about liquidity so confusing that we serve them best by keeping the information secret,” and that the SEC’s rulemaking creates uncertainty for market participants who have already made significant investments in the liquidity classification framework.”)
 See Henry T.C. Hu, Too Complex To Depict? Innovation, “Pure Information,” And The SEC Disclosure Paradigm, 90 Tex. L. Rev. 1601, 1602 (2012) (“[m]odern financial innovation has resulted in objective realities that are far more complex than in the past, often beyond the capacity of the English language, accounting terminology, visual display, risk measurement, and other tools on which all depictions must primarily rely.”)
 See Song Han & Dan Li, Liquidity Crisis, Runs, and Security Design – Lessons from the Collapse of the Auction Rate Securities Market, SSRN (February 15, 2009), available at https://ssrn.com/abstract=1327429.
 See Central Bank of Ireland, Feedback Statement on DP6 – Exchange Traded Funds (2018), at 11, available at https://www.centralbank.ie/docs/default-source/publications/discussion-papers/discussion-paper-6/feedback-statement-on-exchange-traded-funds—discussion-paper-6.pdf?sfvrsn=2 (hereinafter “CBI Feedback Statement”).
 See Song Han & Dan Li, The Fragility of Discretionary Liquidity Provision: Lessons From The Collapse Of The Auction Rate Securities Market, Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board (May 2010), available at https://www.federalreserve.gov/pubs/feds/2010/201050/201050pap.pdf.
 See CBI Feedback Statement, supra note 103 at 47-48.
 See Su, supra note 23 at 22.
 See CBI Discussion Paper, infra note 112 at 26.
 See Hu & Morley, supra note 18 at 846, 861-863.
 Id. at 846, 855-863.
 Id. at 849.
 See Lau & Flaherty, supra note 96.
 Central Bank of Ireland, Exchange Traded Fund Discussion Paper (2017), at 11, available at https://www.centralbank.ie/docs/default-source/publications/discussion-papers/discussion-paper-6/discussion-paper-6—exchange-traded-funds.pdf (hereinafter “CBI Discussion Paper”).
 See CBI Feedback Statement, supra note 103 at 47-48.