I am shocked to discover all that the rapid spread of the new Exchange Traded Funds has resulted in private investors are routinely their right to benefit from short opportunities promoted by sponsors, underwriters, exchanges and brokerage firms denied.
Since their inception in 1993, ETFs were advertised as available for short, many without the burden of uptick rules or the need to riskier strategies such as options, futures, use. With a lever However, given the average retail investors of the shaft, while institutional investors and brokers trading desks do easily.
This is a flammable and potentially scandalous situation. Since the mutual fund trading scandal rocked Wall Street in 2003, ETFs have become the preferred alternative to conventional mutual funds. This has led to an explosion of ETF issuance. At the same time the demand for short, most market sectors either rising or trading ranges thus less clear. At some point, this may change market position. Investors to strategically hedge their portfolios or speculate popular ETFs may find difficult, if not impossible, to short.
"No Stock Available" for Short ETF Trades?
Like so many other investors, for a long period, we just followed the main ETFs - the QQQQ, SPY, and IWM - and highly liquid short-circuit these funds was both easy and routine.
We of the ETF Digest invoked representations of all promoters that all ETFs were short bootable. Some time ago we published our first short recommendation for each ETF in a long time - TLT (the Lehman 20 + year Treasury Bond ETF). Although I was able to be implemented by means my broker, subscriber feedback indicates that a significant number of them were not able to make this transaction. This transaction These persons were engaged in a wide range of well-known online brokers, and were routinely told that there is "no TLT stock available" for short.
This was a shock! TLT were on average about one million shares in daily trading. How could a TLT million shares traded daily without stock are available?
Upon further investigation, knowledgeable insiders explained that a large part of the volume we were seeing was of shares institutionally traded or, more likely, from stock held by the proprietary trading desks of major brokerage firms - in other words, "phantom volume." That is why private investors were deprived of the opportunities enjoyed by shorting a handful of brokers and institutions.
Upon further investigation, it was pointed out that many new ETFs may not be short-circuited by a lack of forward contracts which specialized companies can offset risk. But surely this was not the case for TLT, an adequate and readily available Treasury bond futures contracts.
What's the problem here?
It is true that time zone differences for some single-country funds that trade in the U.S. can make it more difficult for specialists to manage, despite adequate apparent volume risks. But as specialized companies and brokers want private investors to meet, they are always able to create synthetic offsetting positions with other brokers -. 'If they want "the operative sense
Moreover, other feedback suggests that brokers may prefer not to short for their retail clients, because they can be called as the "risk" going short sales wrong. This is nonsense! Many of these same companies are option strategies for the same customers they have a short position refused orders. And, unleveraged short circuit is arguably less risky than many option strategies.
Cynical, sponsors this issue major new 50-110K blocks share benefit from additional fee income through the new issue. Short circuit for retailers is to deal with existing shares simply means that there is no increase in commission income and no incentive.
Most of the explanations offered for ETF shorting problems distract attention from the core retail edition: institutions and brokerage trading desks get preferential treatment at the expense of retail investors.
We also see a number of other related problems:
ETF sponsors and exchanges have been sloppy in their presentation of new ETFs. It seems that they just "cut and pasted" the short benefit function language from older established for new ETFs. They can not even aware that their new products benefit non-professional clients, as promoted.
The hasty creation of new ETFs, especially those not linked to a known or listed index, presents further difficulties. Without hedge, a matched-index specialists are even less likely to run short trades for customers.
The "phantom volume" exhibited by TLT also exist for other popular ETFs such as EEM (Emerging Markets ETF, EFA (Europe / Asia Far East ETF, IYR (REIT ETF), and much more. Taking advantages for the "big boys "while shutting out" the little guy "are the conditions that understandably turn private investors away from the markets.
Bureaucratic laziness exists when brokers and specialized firms encounter unmet retail customer needs. Back Offices and specialists lack initiative when it comes to serving individual, low-volume investors.
We believe ETF sponsors, exchanges, insurers and brokers have not adequately thought through the process to complete the creation of new ETFs.
Solution
Shorting opportunities are identified as a major product advantage in all promotional literature ETFs. Exchanges, brokers, insurers and sponsors can and should work together to deliver as promoted these opportunities.
To address this problem release "inverse" ETFs (those that move in the opposite direction of an index) would solve all pleasure. Insiders would benefit from a greater fee income, while investors the tools they need to get.
Dave Fry has more than 30 years dedicated to the business of trading and portfolio management. His registration as an arbitrator in both the National Association of Securities Dealers (NASD) and the National Futures Association (NFA) attests to his extensive experience and spotless compliance record.
Dave founded the ETF Digest in 2001 and was one of the first to the need for a publication that individual investors with information and advice on ETF investing see.
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