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ETFs - A New Source of Noise to Markets
A larger percentage of market flow is directed towards basket trades, it may create a de stabilizing influence upon markets. Studies show that baskets can lead to information linkages between securities in the same basket. Market makers cannot perfectly distinguish between price changes caused by factors pertinent to their assets and other factors irrelevant to them. Further, market makers may not be able instantaneously synchronize their prices, which may lead to further price distortion.