With the preceding mechanics in mind, it will come as no surprise that there can be enormous one-way moves in ETF-driven stocks in very short periods of time. This happened en masse in May 2010 during the so-called Flash Crash (chart 2), and again in October 2011 when stocks experienced a "Flash Up" as the Russell IWM (Russell 2000 small cap ETF) rallied almost 7% in the 20 minutes prior to the close (chart 3). This happens as buyers of futures and ETFs, generally triggered by news or technical price patterns, all jump in the water at the same time. The APs, who by regulatory requirements must provide constant bid and ask prices for each ETF, then scramble to purchase other closely related packages of the same securities or the underlying stocks themselves.

High co-movement of securities is not new, often occurring when markets reflect crowd panic or euphoria. What is new, however, is how ETFs decrease diversification benefits, with stocks and sectors worldwide moving together, even when there is no panic. Stocks move together today more than at any time in modern market history with recent data indicating that individual common stock prices that make up the S&P 500 index now move with the index 86% of the time (chart 5 and chart 6). As has been described, there are now so many products consisting of the same common stocks that it would be surprising only if this tight linkage was not evident.