How crazy was the market on Wednesday: SPY saw a significant premium! This is the most liquid ETF in the world

One of the largest and most liquid ETFs in the world, SPY, experienced a historic shock this Wednesday!

On that day, the U.S. stock market staged a "miracle day", with the S&P recording its largest increase since 2008, and trading volume in the U.S. stock market hitting a historical high. By the end of the day, the trading price of SPY was about 90 basis points higher than its net asset value (NAV), marking the largest premium since 2008. This phenomenon highlights the craziness of the trading on that day, with SPY soaring 10.5%, achieving the largest single-day increase in sixteen years.

In contrast, over the past decade, the average deviation between SPY and its net value has been less than one basis point. There were deviations between price and net value at the beginning of the COVID-19 pandemic in 2020, but none reached the level seen on Wednesday.

Some analysts believe that the unusual closing auction volume, extreme market volatility, and short covering led to rare liquidity pressure, which may have caused the surge in SPY's premium. In an interview, Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, stated:

This is a characteristic of SPY; it is a highly liquid trading tool that facilitates position changes for a large number of traders and investors... Given the enormous volatility we saw during the day yesterday, especially near the close, there were a lot of buy orders coming in, pushing the price above the net value.

However, it is worth noting that the "pendulum effect" continued to play out. By Thursday afternoon, SPY had dropped 4.7%.

Unprecedented Liquidity Pressure

Bloomberg data shows that the SPY fund trades an average of about 56 million shares daily, known for its liquidity. However, the closing auction volume on Wednesday was about 300% higher than usual, with over 241 million shares of SPY changing hands, which may have been one of the factors pushing up the premium.

Dave Mazza, CEO of Roundhill Investments, stated:

The market volatility yesterday was so extreme that even the world's most liquid ETF was not spared, with the closing auction price far exceeding its fair value.

His calculations showed that about 8 million shares were traded at prices approximately $5 higher than the closing auction price.

Short Covering Led to Massive Inflows

However, there are other viewpoints: Ling Zhou, head of equity derivatives strategy at TD Securities, believes that short covering is another reason for the massive inflow of funds into SPY on Wednesday afternoon.

He thinks that investors holding net short positions in the stock or options market had to chase the price after Trump announced a suspension of tariffs. Due to the harsh market environment, it was nearly impossible to hedge risks through other means, making SPY an emergency hedging toolCurrent volatility has significantly increased, leading to a notable rise in the cost of purchasing options. Additionally, market liquidity tightened on Thursday, with wider bid-ask spreads for stocks and other financial instruments, leaving investors with very limited choices.

This reflects how much damage was done to short positions during yesterday's rebound... Liquidity has worsened, and investors need to hedge their shorts through SPY.

Investors Should Wait for the Market to Calm Down

According to data from World PE Ratio, as of April 10, the estimated price-to-earnings (P/E) ratio for the S&P 500 Index (calculated through the SPY ETF) is 25.90. The platform indicates that this P/E ratio falls into the "overvalued" category under its estimation system.

Since SPY is based on the S&P 500 Index, this P/E ratio implies that: investors may need to wait for a while for the market to calm down.

The next few trading days, especially after the release of the Consumer Price Index (CPI) data (which currently shows inflation has cooled for two consecutive months), will determine how this wave of increase will unfold.

Bloomberg Intelligence analyst Athanasios Psarofagis stated:

I think we are likely to see more price deviations in SPY and other ETFs, which is not uncommon in panic markets... That said, the overall performance of ETFs remains quite robust