Why Big Trades Don't Always Move ETF Prices

A Tale of Two Trading Screens

Open most trading platforms and you will see a number next to every fund: average daily volume, or ADV. It is the average number of shares or contracts that change hands each day. Simple enough. ADV is one of the most quoted statistics in markets, and it quietly shapes how people judge whether an investment is easy to get into and out of.

Now picture two exchange-traded funds, or ETFs. (An ETF is a basket of securities that trades on an exchange like a single stock.) One shows millions of shares traded daily. The other shows a fraction of that. On the surface, the first looks far easier to trade. Yet a large investor might move a sizeable position in the quiet one without causing much fuss — while the busy-looking one might prove harder to shift than expected. That gap between appearance and reality is worth understanding, because it sits at the heart of how modern liquidity actually works.

What an ETF Really Is

An ETF is best understood as a wrapper around a basket of underlying securities — stocks, bonds, or other assets. Its liquidity comes primarily from the tradability of that underlying basket, not from how many ETF units happen to change hands on a given day. That distinction matters, and it is one of the most misunderstood aspects of ETF investing.

This works because ETFs are open-ended. Unlike a common stock, which has a fixed number of shares, an ETF can create new units or redeem existing ones based on investor demand. The process runs through the primary market, where a designated broker or market maker delivers a basket of securities to the ETF sponsor and receives ETF units of equal value in return. Those units are then sold on the exchange. Redemptions run in reverse.

The institutions that handle this are called authorised participants, or APs — large market makers with the ability to exchange big blocks of ETF shares against the underlying securities. Because of them, an ETF can absorb trades far larger than its displayed volume suggests. In a real-world example, one international equity ETF with a 30-day average daily volume of roughly 27,000 shares saw a single trade of nearly 600,000 shares — more than ten times its ADV — executed a cent inside the bid, without widening the spread.

Why ADV Can Mislead

So ADV is not a reliable proxy for ETF liquidity. If an ETF holds securities that are liquid and easy to trade, then even a fund with modest daily volume can handle sizeable transactions. If it holds securities that are hard to source, the creation and redemption machinery gets harder to run — and that constraint, not the ETF's own volume, becomes the real limit.

A gentler way to put it: judging an ETF by its daily volume is a bit like judging a restaurant by how many people walk past the window. What matters is what is happening in the kitchen. The practical measure many professionals prefer is implied liquidity — an estimate of how much of an ETF can trade without disrupting prices in the ETF or its underlying holdings. That gives a fuller picture of accessibility, and it is especially useful for newly issued ETFs whose short trading history makes ADV look artificially thin.

When Volume Rises But Liquidity Falls

Here is where things get genuinely counterintuitive. Regulators have looked at using trading volume as a liquidity classification tool. The US Securities and Exchange Commission has proposed amendments to its liquidity rules for open-end funds that would standardise equity liquidity classifications and assign buckets based on volume — on the assumption that higher volume means faster, easier selling. One key assumption in the proposal: asset managers may treat 20% of average daily volume as tradeable in a single day.

The catch is that volume and liquidity are not the same thing. In volatile markets, trading volume can surge while other liquidity measures deteriorate. During the March 2020 market crisis, equity trading volume more than doubled — yet observed bid-ask spreads and modelled transaction costs rose significantly for constituents of a broad global equity index. Applying the proposed volume-based rules, equity funds might have appeared to hold fewer illiquid positions during the worst of the stress and more highly liquid ones. Then, as markets recovered in April and volumes fell, the classification could have flipped back. The liquidity profile would have looked better precisely when conditions were worse.

This is a useful reminder that any single metric, however tidy, is a simplification. Bid-ask spreads, market impact and transaction costs all tell part of the story, and they can move in opposite directions to volume.

Order Flow: The Amplifier Hiding in Plain Sight

The same tension shows up in the world's deepest markets. Research from the Federal Reserve Board examined the US Treasury market turbulence of early April 2025, when rapid news flow around announced tariffs triggered sharp volatility. On two separate days — 7 April and 9 April — liquidity supply fell by comparable amounts, and intraday trading volumes spiked nearly tenfold relative to prior-month averages for the same time of day. Yet the price moves on those two days were strikingly different.

What explained the difference was order flow imbalance — the gap between buyer-initiated and seller-initiated trading. On 7 April, cumulative selling pressure surged past $2 billion, a large, sustained, one-directional wave that pushed prices hard. On 9 April, the imbalance swung in both directions and never exceeded $1 billion, so prices absorbed the news far more calmly.

The lesson: when market depth is thin and liquidity is fragile, large one-sided flows have far more room to amplify price moves. Surges in trading volume alone did not distinguish the two days. The direction of the flow did. Monitoring order flow imbalance — not just headline volume — is becoming an important tool for assessing whether liquidity demand is outstripping supply.

Position Limits: The Speed Bumps on Speculation

Alongside flows, there are rules designed to keep markets from being overwhelmed. In the US, the Commodity Futures Trading Commission (CFTC) sets federal speculative position limits on 25 physically-settled commodity derivative contracts and certain linked instruments. These caps restrict how large a speculative position a single participant may hold.

Spot month limits — those applying as a contract nears delivery — are set at or below 25% of estimated deliverable supply. Non-spot month limits generally sit at 10% of open interest for the first 50,000 contracts, with an incremental increase of 2.5% of open interest beyond that. The framework includes carve-outs for genuine commercial hedging: a bona fide hedging position must substitute for transactions in a physical marketing channel, be economically appropriate to reducing price risk in running a commercial enterprise, and arise from changes in the value of actual or anticipated assets, liabilities or services. Exemptions also extend to spread transactions and to positions taken on during another participant's default or bankruptcy. The rules apply across exchanges and the over-the-counter swaps market.

The intent is straightforward: a position limit is a speed bump against excessive speculation causing sudden or unreasonable price swings. Whether these thresholds are set at the right level is a matter of ongoing debate — and the specifics differ by jurisdiction, so the numbers above are not portable across markets.

Where the Plumbing Meets the Pressure

When liquidity really does strain, the consequences reach further than a single fund. Research from the Bank for International Settlements studied how stress travels between banks and investment funds. When market pressure on banks intensifies from an already elevated level, net flows tend to decline across open-ended corporate bond mutual funds, corporate bond ETFs and prime money market funds alike — and that commonality has risen materially over time.

Within this shared pattern, there is a meaningful split. Bond ETFs can act as a stabilising force, because salient features of their business model help attract investor inflows during stress. Bond mutual funds behave differently: outflows from them can contribute to a tightening of market conditions when banks are already under pressure, particularly when those funds hold thin cash buffers and respond by hoarding cash — the flip side of selling illiquid assets.

The mechanism behind the ETF resilience is worth spelling out. Because redemptions in bond ETFs are typically settled in kind — in securities rather than cash — sponsors can adjust the composition of the redemption basket when conditions are difficult. And with a small number of APs per ETF, those APs internalise the price impact their own redemptions would create. Largely because of this, bond ETFs tend to hold up better than their open-ended cousins when the weather turns.

What This Means for You

None of this tells you what to buy or sell, and nothing here guarantees an outcome. Markets change, and rules vary meaningfully by country and product.

What it does suggest is a habit of mind. Treat average daily volume as a starting point, not a verdict. If you are trading ETFs, using limit orders rather than market orders gives you more control over execution, and timing matters — spreads often widen in the first half hour as price discovery happens. For very large trades, contacting the ETF issuer's capital markets desk is a normal and legitimate step. And when you read about a dramatic price move, it is worth asking a second question beyond "how much traded?" — namely, "which way did it lean?" The answer is often more revealing.