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Barclays Starts Unwinding Inverse Triple Leveraged ETFs

Tyler Durden's picture




 

The days of the inverse triple (then double, then single) leveraged ETFs are coming to an end. And in a market where the only direction is only up, with zero volatility, zero distributions, and now, zero volume, we wish them a quick and painless death. Barclays Bank has just announced it is suspending creations of its inverse leveraged ETN to the S&P500, in an act that is supposedly "a reflection of what rising stock prices can do to the price of a security designed to produce profits in a falling market" but is really a capitulation by one of the last leveraged ways to play the failure of central markets. Of course, Iosif Vissarionovich Bernanke will fail eventually, as central planning always does, but by then there will be no readily accessible ways to play the downside.

From Index Universe:

The Barclays Short D Leveraged Inverse S&P 500 TR ETN (NYSEArca: BXDD), which is now trading at about $16 a share, would be automatically redeemed should its intraday indicative value fall to $10 or lower before the note matures, Barclays said in a press release. Barclays said it “temporarily suspended any further sales from inventory” of the notes. A Barclays official declined to elaborate.

“Based on the performance of the underlying index since the inception date of the notes, it is likely that a stop loss termination event may occur with respect to the notes,” the company said in a press release, adding that daily redemptions are not affected by its decision. A Barclays official declined to elaborate beyond the content of the press release.

The notes were trading at around $64 a share when they were launched in November 2009, and, again, are now trading around $16. The S&P 500, meanwhile, has risen 30 percent in the past year, fueled by the Federal Reserve’s loose monetary policy and cautious optimism that the U.S. is slowing digging itself out of its worst downturn since the 1930s.

For those who are long the BXDD and one day look at their brokerage accounts only to see a token amount of money where the ETF once was, here is the reason:

Should a stop-loss termination event occur, note holders would receive a cash payment equal to the stop-loss redemption value, which will be determined by what Barclays called the “calculation agent.”

The payment will be less than the principal amount per note, and won’t exceed $10 per note, the company said.

Look for a comparable fate to befall all other inverse leveraged synthetic CDOs, until the only remaining products are those allowing a leveraged bullish expression. And when those who are set on fighting the Fed decide that shorting these is the natural next step, look for various custodians to raise collateral and margin rates (or simply make them HTB) on all positive levered ETNs making shorting virtually illegal.

 

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Wed, 02/09/2011 - 15:05 | 947154 Gubbmint Cheese
Gubbmint Cheese's picture

"mission accomplished"

Wed, 02/09/2011 - 15:23 | 947234 DoChenRollingBearing
DoChenRollingBearing's picture

Yep, the Bearing is an FAZ casualty...

Wed, 02/09/2011 - 15:08 | 947165 A55H0LE_Lawyer
A55H0LE_Lawyer's picture

Gold and silver bouillon.  Buried in the backyard, or--preferably--safely abroad.

Wed, 02/09/2011 - 15:25 | 947237 DoChenRollingBearing
DoChenRollingBearing's picture

+ $1360

+ $1360 more for gold abroad.

Wed, 02/09/2011 - 16:14 | 947375 AR15AU
AR15AU's picture

This is a dress rehearsal for the fate of SLV

Wed, 02/09/2011 - 15:09 | 947174 blind squirrel
blind squirrel's picture

Wow, this could mark a top.

Wed, 02/09/2011 - 16:36 | 947424 Raynja
Raynja's picture

My thoughts exactly, the introduction of leveraged etf coincided almost exactly with the last crash.

Wed, 02/09/2011 - 15:09 | 947175 Joe Grannville
Joe Grannville's picture

MWN

Wed, 02/09/2011 - 15:10 | 947181 Racer
Racer's picture

Hmm, capitulation by Barclays on short funds eh

Wed, 02/09/2011 - 15:11 | 947184 Spaceman Spiff
Spaceman Spiff's picture

It is a sad day for our 'free market' when this homely man has a better chance at snagging a girl that goes both ways than investing in a market that can go both ways.

Wed, 02/09/2011 - 15:11 | 947186 Saxxon
Saxxon's picture

Triple-inverse ETFs are the only cheap asset out there.

Wed, 02/09/2011 - 15:14 | 947202 william the bastard
william the bastard's picture

More bears capitulate

Wed, 02/09/2011 - 15:42 | 947296 Johnny Lawrence
Johnny Lawrence's picture

Love it.  Let the sentiment get even more extreme.  The harder the crash will be.

Wed, 02/09/2011 - 15:19 | 947215 b_thunder
b_thunder's picture

lets ban all the short selling, clsoe all inverse CDOs, etc.  - eventually, without couter-balances the resulting crash will be that much bigger

 

Wed, 02/09/2011 - 15:26 | 947243 DonutBoy
DonutBoy's picture

Don't forget subpoenas for everyone who utters "default"

Wed, 02/09/2011 - 15:39 | 947282 Rogerwilco
Rogerwilco's picture

Yes, that was my initial reaction -- they're planning a general moratorium on short sales. Can't allow those evil speculators to gain any advantage in this hour of crisis...

Wed, 02/09/2011 - 15:19 | 947221 Popo
Popo's picture

Are they worried about a mad rush to the inverse etfs for some reason?

Wed, 02/09/2011 - 15:22 | 947228 AR15AU
AR15AU's picture

Top is in... the masses will not be allowed to profit on the downside.

Wed, 02/09/2011 - 15:24 | 947235 raya123
raya123's picture

Agreed.

Wed, 02/09/2011 - 17:07 | 947507 c-rev with a twist
c-rev with a twist's picture

There's always puts or short futures positions.

Wed, 02/09/2011 - 15:21 | 947229 slackrabbit
slackrabbit's picture

I wonder who was leaned on for this to happen or why....a correction is in the air perhaps?

Perhaps the Fed has decided it doesn't need Qe3, it just needs to elimate the ability to sell short....then the sky's the limit....after all, why stop now?

Wed, 02/09/2011 - 20:21 | 947972 Golden monkey
Golden monkey's picture

"Perhaps the Fed has decided"

The decision is all about control.

Controlling direction was not enough.

They went for the volatility killing.

And they get : zero volume.

The Canadians SOB fucked you mom, Benny.

Wed, 02/09/2011 - 15:22 | 947232 raya123
raya123's picture

It won't drop to $10, don't worry.

Wed, 02/09/2011 - 15:25 | 947238 uhb
uhb's picture

Just short the fucking T-Bill futures?!

Wed, 02/09/2011 - 17:08 | 947509 c-rev with a twist
c-rev with a twist's picture

Exactly.  That's probably the best short trade there is, but we may be near a short term bottom for now.

Wed, 02/09/2011 - 15:25 | 947240 Misean
Misean's picture

"but by then there will be no readily accessible ways to play the downside."

Ah, but my supply of used toilet paper will be worth a whole lot of Benny Bucks by then...or as I like to say, worth more than all the gold in Fort Knox!

Wed, 02/09/2011 - 15:25 | 947242 firstdivision
firstdivision's picture

I would take this as a sign that the market top is either forming, or in.  They could always just do inverse splits until there is only 1 share left. 

Wed, 02/09/2011 - 15:31 | 947262 BearOfNH
BearOfNH's picture

Yeah, TZA splat 1:4 not too long ago. Since then it's lost about half its value.

Wed, 02/09/2011 - 16:37 | 947436 Raynja
Raynja's picture

Same with vxx

Wed, 02/09/2011 - 15:32 | 947252 papaswamp
papaswamp's picture

Corn now + 3.78% (floor) settled 699.25 up 97% over a year

Wheat + 1.69% (floor) settled 889.00 up 57% over a year

Soy + 1.38% (floor) settled 1454.00 up 84% over a year

Wed, 02/09/2011 - 15:31 | 947260 Mach1513
Mach1513's picture

Sad. These triple-inverses saved my portfolio in late 2008 and early 2009.

That was before my broker banned trading in them.

Wed, 02/09/2011 - 16:07 | 947356 Johnny Lawrence
Johnny Lawrence's picture

My employer did the same.  I think it was a brokerage-wide thing.

To be fair, the inverse ETFs were a bit shady in how they marketed themselves.  I'd wager that most investors who bought them didn't realize they were daily-correlated.

Wed, 02/09/2011 - 15:33 | 947267 ZeroPower
ZeroPower's picture

The days of the inverse triple (then double, then single) leveraged ETFs are coming to an end.

Disagree with this, the whole issue with ETFs (and even more-so for the leveraged ones) is the physical vs sythentic debate. While all ETFs can be interpreted as 'synthetic', the issue of their holdings is an important one to consider when choosing what way the ETF should track its benchmark/underlying.

While physical used to be the most popular form of backing your ETFs, recently the switch has been going on to sythentically structured ones, i.e. backed by another counterparty through swaps. While the risk here is, if that counterparty defaults, there is no obligation to pay anything underlying to the ETF, the advantage is that there is (almost) zero tracking error and you can minimize the expense ratio on the security.

Im not familiar with which method BarCap was using for theirs, but either way, its safe to say any levered security coupled with volatility should, within time, go to zero.

Wed, 02/09/2011 - 16:40 | 947434 SwingForce
SwingForce's picture

ZP, say that 10 times fast. You're nuttz, "What is the HOLDINGS of FAZ, a <-3x> levaraged ETF". Please explain how rubber bands & springs can possibly be evaluated? Look under the hood.

Wed, 02/09/2011 - 17:45 | 947611 ZeroPower
ZeroPower's picture

Interestingly enough, if you were to look under the hood of the FAZ (the FAS is somewhat more straight forward as its largest positions are JPM, WFC, C, GS, bunch of pos REITS, etc etc) youd be surprised to find it holds nothing more than some swaps on the Russell and some equity-linked positions to JPM and GS securities. Indeed these positions can't be evaluated on-the-fly, and thus theyre re-balanced at the close of every day, and here is where the kicker - tracking error - comes in, and basically kills any sort of long position you'd have whether its in the bull or bear ETF. 

Wed, 02/09/2011 - 15:34 | 947268 Downtoolong
Downtoolong's picture

by then there will be no readily accessible ways to play the downside.

 

I'm sure the marketers and fund managers at the TBTF Banks will come up with something for investors to try and chase the market back down, but, only after their own traders short the hell out of it first.

 

Wed, 02/09/2011 - 16:44 | 947450 SwingForce
SwingForce's picture

Come up for some air, buddy. You don't want to short an inverse (anything) in a falling market. But I WOULD want the TBTFs to short it and have The Death Star explode, just like in the movie.

Wed, 02/09/2011 - 15:34 | 947271 DoChenRollingBearing
DoChenRollingBearing's picture

Way O/T, but Icelandic volcanos is a popular topic here at ZH:

http://www.sott.net/articles/show/223419-Icelandic-Volcano-Set-to-Erupt-

 

Wed, 02/09/2011 - 15:36 | 947275 Quinvarius
Quinvarius's picture

They were probably eating into the options market profits anyway.

Wed, 02/09/2011 - 16:46 | 947459 SwingForce
SwingForce's picture

They have options on them, the liquid ones. Its like Options on Options! And a few of them now have Weekly Options (I won't mention FAS & FAZ) my favorite Bank/REIT etf.

Wed, 02/09/2011 - 15:37 | 947278 A_MacLaren
A_MacLaren's picture

Some clarification is desired, in the case of Leveraged Equity related/indexed ETF/ETN:

An ETN, Exchange Traded Note, is a debt obligation to pay a yield (or rate of return) equal to an underlying benchmark or index % change.  Its underlying components could literally be composed of anything, as long as it performs correctly, relative to its benchmark.

Vs.

An ETF, Exchange Traded Fund, is an equity vehicle, supposedly composed of equity products and options or swaps or swaptions.  Its holdings could be short actual equities or other ETFs related to the benchmark, options, swaptions, etc.

So, might not one class, ETNs ("risk mgmt on the part of the issuer") go away, while the other, ETFs continue?

 

Wed, 02/09/2011 - 15:54 | 947323 ZeroPower
ZeroPower's picture

I mentioned this up above, but i believe the real issue in this space is the way theyre (ETF/ETN both) structured.

Older companies who've had the larger market share (though currently see it decreasing as theres an ever larger rush into this space) like iShares relied on physical (directly buying the equity or whatever it tracks) replication to structure their products. Other firms (think any new DB, BarCap, Horizons) are now mainly (i.e. any new products) using swap-based replication with other counterparties since it generates larger revenues due to how theyre created.

Wed, 02/09/2011 - 16:52 | 947471 SwingForce
SwingForce's picture

Please explain how the bid/ask is dictated? I mean, I know about the corralation to the index part, but that's theoretical. How does the bid/ask get maintained in the real world of HFTs etc? In a free-swinging market, I never understood how they did that, you have some smarts to share, please.

Wed, 02/09/2011 - 23:05 | 948310 fellatio is not...
fellatio is not fattening's picture

This may seem convoluted but read it and it will make sense....The BID (sell price) is the highest price anyone is offering to BUY (pay) for the stock.  The offer price is the LOWEST price anyone is willing to SELL their shares for.  Thus if the bid/offer is $20.15 x $20.19 than the highest limit order placed anywhere to buy is $20.15 and the least anyone anywhere is asking to sell their shares for is $20.19.  The number to the right of the bid or offer is called the "size" total number of shares in 100 share lots, available for the current price posted.  I hope that helps.

Wed, 02/09/2011 - 15:39 | 947283 El Hosel
El Hosel's picture

  Flash crash in PBR....?

Wed, 02/09/2011 - 16:37 | 947429 DoChenRollingBearing
DoChenRollingBearing's picture

Wow, stockcharts.com would say yes!

Wed, 02/09/2011 - 15:41 | 947294 buzzsaw99
buzzsaw99's picture

No-one will be allowed to profit from the coming collapse other than the squid holding company.

Wed, 02/09/2011 - 15:46 | 947307 HCSKnight
HCSKnight's picture

Hence the name "product"....

The ave daily volume should have kept anyone with 1/2 a brain out of BXDD.

However, the same logic of this piece does not yet apply to the very liquid -3x ETFs; e.g. FAZ, SPXU, TZA, EDZ....

Btw, can one think of a better sell call than the creator of bear products capitulating...

 

Wed, 02/09/2011 - 15:55 | 947324 El Hosel
El Hosel's picture

 Khight,

 "Btw, can one think of a better sell call than the creator of bear products capitulating"

   Joe Battapaglia broke down on Kudlow and went Bullish a week or so ago.

Wed, 02/09/2011 - 16:22 | 947398 topcallingtroll
topcallingtroll's picture

Not Joe! I capitulated on my spy top call too. Thats probably a better indicator than joe.

Wed, 02/09/2011 - 16:03 | 947346 william the bastard
william the bastard's picture

Stuart Varney (FBN) says "Buy American Big Cap Growth"!!

There's a sign in that somewhere.

(My excuse for watching is that he came on right after Imus-the anti CNBC- but he actually somewhat yelled) 

Wed, 02/09/2011 - 16:55 | 947478 SwingForce
SwingForce's picture

My son grew up on Stuart Varney's TBond reports at 6am on FNN or CNN(1976)

Key word today, "Growth". 

Wed, 02/09/2011 - 16:19 | 947389 topcallingtroll
topcallingtroll's picture

Could this be a sign of capitulation? Time soon to go long tvix and buy some double inverse spy? Surely there are more but i havent looked recently.

Wed, 02/09/2011 - 16:25 | 947402 speedius
speedius's picture

The real negative here (assuming this is the start of a trend) is no longer being able to short the long/short 3x's against one another.

Sun, 02/13/2011 - 15:26 | 957917 edwardscpa
edwardscpa's picture

Bingo.

Wed, 02/09/2011 - 16:34 | 947421 SwingForce
SwingForce's picture

So, Barclay's sold short at $64 and is covering at $10? Not a bad little fraud project.

Wed, 02/09/2011 - 16:51 | 947466 redpill
redpill's picture

I've had really bad poker hands that I didn't fold this deliberately

Wed, 02/09/2011 - 17:07 | 947502 SwingForce
SwingForce's picture

The Triple Lindy: Triple Inverse Back Flip, Back Split, Create your own private Idaho, er, Index, then pull it from stock quote quotation svcs. R1FIN yes that's who I'm talking about! How can see The Index?

Wed, 02/09/2011 - 17:10 | 947514 jmcadg
jmcadg's picture

'No-one will be allowed to profit from the coming collapse' Just go to any betting index and clean up on the way down. No f**kin' different to these c**ts with their geeky bluffs and double bluffs. Bunch of arse.

Wed, 02/09/2011 - 17:13 | 947525 rlouis
rlouis's picture

How much BS are these products? Look at the QID on May 6th during the flash crash.  For a short "product", it should have gone up but actually went down.  lol - the casino is rigged...ROFLMAO

 

 

Wed, 02/09/2011 - 17:18 | 947540 Greater Fool
Greater Fool's picture

Hm, looks like they had their hand in the cookie jar a little bit. My guesswould be that they had the cash generated from creating these units in things with maybe a bit longer of an aggregate duration than they ought to have, and the run-up in yields combined with their position in the underlying generated an...ahem...funding gap. Just a guess, mind.

Wed, 02/09/2011 - 17:33 | 947581 Djirk
Djirk's picture

time to short!!!!!

Wed, 02/09/2011 - 18:07 | 947692 toros
toros's picture

Time for a new uptick rule.

Wed, 02/09/2011 - 18:28 | 947731 Ras Bongo
Ras Bongo's picture

Get the fuck out of ETN!

Wed, 02/09/2011 - 18:40 | 947760 mynhair
mynhair's picture

Oh ya, screw the little guy top caller, that's finally right.

Beestards.

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