Skip to comments.Tom Stevenson: ETFs have potential to become the next toxic scandal
Posted on 09/21/2011 10:32:30 AM PDT by Razzz42
Back in April, the Financial Stability Board (FSB), an international super-regulator, wrote a prescient if less than catchily-titled paper "Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)".
Its central warning that ETFs are not the cheap and transparent vehicles the marketers would have us believe was spot on. When UBSs $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence.
The past ten years have seen an explosion in the popularity of ETFs. In part this reflects some of their acknowledged benefits relatively low costs and the ability for investors to trade them throughout the day. A third claim, that ETFs are simple products, may once have been true but it no longer holds water. Many of these funds are now fiendishly complicated and way beyond the comprehension of the individual investors and professionals alike who are buying them.
Here are just a few of the reasons why ETFs are not all they are cracked up to be.
First, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla "full replication" ETFs which do, 45pc of the market is in the form of so-called "swap-based" ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.
(Excerpt) Read more at telegraph.co.uk ...
A big unrecognised risk with ETFs is related to the ease with which traders hedge funds in particular are able to use the funds to short markets. For reasons which I'm not sure I could explain even if I had the space, it is possible for the number of shares sold short in an ETF to massively exceed the actual number of shares available. It has been suggested that the "Flash Crash" of May 2010, in which US shares fell 1,000 points before bouncing back in a matter of minutes, was a consequence of this around 70pc of cancelled trades at the time were reported to be for ETFs.
All you have to consider is the now defunct on-line poker industry. They had deposited way more player funds than they could disburse.
It was supposed to be a zero sum game less the “rake” to operate. Apparently, it was never operated that way.
Since the host company is a black box, no one knew.
You can’t possibly be serious!!
Get hip dude, this would raise funds & dampen killer computer trading.
The programmer knew (whomever programmed and modified the software) and the accountant(s) who kept the books also knew.
Takes periodical carbon based beings (human) intervention to make scams work and just to keep legitimate operations going.
Thanks for recognizing my superior intellect. /blushing
I’m not the only one, who doesn’t like the very idea of a financial transaction tax.
("The defense is wrong!" My Cousin Vinnie),
look folks, you can't have those little umbrellas in your drinks for a little while, we need them to patch the hole in the boat caused by all you drunken dancing!
Oh gee..........another one who thinks TAXES are a good thing. Are you from DU or are you looking for a revenue stream to feed a pet project?
ETF’s are day trading vehicles.
Ask Richard Wolff.
I’m not going to ask Richard Wolff a thing. I don’t know who he is, nor do I care. You, OTOH, can take your “taxes” and go elsewhere. It’s those attitudes that have turned this country into the third-world police state that it presently is.
Like the little weight on a lawnmower engine that acts as a balance/governor to stop wild swings in engine speed, a microscopic transaction tax would ease this trouble we're having.
It's not a tax like you think, and to ease your mind it could be experimental , only for a specified time.
But you know they won't, total destruction is the plan.
I was just exercising academic theory.
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