Testimony: Kauffman Foundation on ETFs Danger to Capital Formation

Testimony

ETFs and the Present Danger to Capital Formation

Prepared Testimony by Harold Bradley and Robert E. Litan

Before the United States Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investments

ETFs have increasingly distorted the role of equities
markets in capital formation, while posing systemic risks from potential
settlement failures.

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Paper: Canaries in the Coal Mine: How the Rise in Settlement ‘Fails’ Creates Systemic Risk for Financial Firms and Investors

Paper

Canaries in the Coal Mine: How the Rise in Settlement ‘Fails’ Creates Systemic Risk for Financial Firms and Investors

Harold S. Bradley, Robert A. Fawls, Robert E. Litan

Kauffman Foundation, 2 March 2011

Our central conclusion is this: Every fail introduces a cumulative and potentially compounding liquidity risk into the orderly process of settling the $7.5 trillion of security transactions completed each day, which could be especially dangerous during times when financial institutions are short of liquidity (as was true during the financial crisis of 2008).

PDF (18 Pages):  Kauffman Canaries in the Coal Mine

Paper: Choking the Recovery: Why New Growth Companies Aren’t Going Public and Unrecognized Risks of Future Market Disruptions

Paper

Choking the Recovery: Why New Growth Companies Aren’t Going Public and Unrecognized Risks of Future Market Disruptions

Harold S. Bradley and Robert E. Litan

Kauffman Foundation, 8 November 2010

We show here that ETFs are radically changing the markets, to the point where they, and not the trading of the underlying securities, are effectively setting the prices of stocks of smaller capitalization companies, or the potential new growth companies of the future. In the process, ETFs that once were an important low-cost way for investors to assemble diversified stock holdings are now undermining the traditional price discovery role of exchanges and, in turn, discouraging new companies from wanting to be listed on U.S. exchanges.

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