Fall in volumes is a common phenomenon in bear markets, but evaporating volumes is a dangerous sign. And this is precisely what is happening with trading volumes of exchange traded funds (ETF) now. Since only few ETFs are traded on a regular basis with reasonable volumes, several others have become a manipulators' den. For example, some of them are now trading at significantly higher or lower levels compared to their respective NAVs.
Just like small-cap companies, most of this manipulation is happening in ETFs with very small assets under management (AUM). How did the situation deteriorate to such a sorry state? While exploring the reasons, let us also think about the possible solutions as well.
First, it is the lack of strong market makers. Almost all mutual funds have launched ETFs and are in the process of launching more new fund offers (NFOs) by exploiting the advantages of ETFs. However, they don't appoint strong market makers, who can provide enough liquidity to the counter and thereby, prevent market manipulation by punters.
Market makers are also expected to give regular bid and ask quotes with low spread between them.
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