Barclays Rigged Its OIL ETN By Limiting New Creation Units

Tyler Durden's picture

Submitted by Daniel Drea via Dark-Bid.com,

On Sunday, we warned readers that the iPath OIL ETN was trading at a 36% premium to its fair value. Today, we witnessed the brutal consequences of a two-class market where institutional traders steamroll the clueless retail investor. The OIL ETN plummeted by 17%, representing a loss of $126 million. Today's trading volume was 36.6 million vs average volume of 3.8 million, as institutional selling absolutely crushed retail investors.

Not what mom-and-pop were hoping for...

 

And compared to other exchange-traded instruments, it was a bloodbath...

 

Despite Larry Fink's relentless efforts to convince everyone how safe ETFs are, these products and their bastard offspring - ETNs - continue to demonstrate exactly how rigged financial markets have become. Barron's uncovered the cause of the huge anomaly in the OIL ETN: The wide premium developed after Barclays limited how many new shares could be created, inhibiting the normal mechanism that keeps an ETN's price in line with its index. The effect of this action appeared immediately:

iPath Oil ETN Premium

Of course, Barclays dodges any responsibility for this, as their ETN disclaimer reads as follows:

Although the ETNs are listed on a U.S. national securities exchange, a trading market for the ETNs may not develop and the liquidity of the ETNs may be limited, as we are not required to maintain any listing of the ETNs.

Barclays is like a casino boss who shakes down a winning blackjack player. Plummeting oil prices sent the value of their ETN plunging. Any short sellers were sitting on massive gains. The easiest way to prop up the price of something is to limit the supply. Barclays did exactly that, artificially inflating the price of the ETN, and crushing any shorts in the process. This is similar to what happened in the mortgage market in 2007 when bearish investors bought credit default swaps on subprime mortgages. As defaults soared, their credit default swaps declined in value because the banks who sold them the insurance were also the market makers who set the prices. Well guess what? The market maker is going to finish unloading his junk before he lets you get out. Oil is the new subprime, and Barclays is rigging the price by restricting the number of OIL creation units they will sell each day.

After we brought the premium to readers' attention on Sunday, Barclays was in the spotlight, and yesterday, they issued an "investor guidance" press release warning investors that the ETN was 41% overvalued. As Barron's noted, "Most investors wouldn't have known anything was amiss." And that's exactly the problem. Why the SEC still allows ETNs to be sold to the average investor remains a mystery.

This isn't the first time an ETN has gone rogue. Last summer, a Goldman Sachs commodity ETN soared after it halted creation units.

Until the SEC gets a clue, the burden remains on financial blogs such as this one to disclose security mispricings that are now frequently exceeding $100 million.

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Temporalist's picture

No!  You mean the drug money laundering bank did something bad?  Unpossible!!!

Cognitive Dissonance's picture

I'm shocked to find cheating going on in this establishment. 

(Here are your ill gotten gains sir.)

Shocked I tell you.

Temporalist's picture

Well at least they weren't also the weapons dealer rogue nation bank too...oh...what's that you say...um, nevermind then.

hedgeless_horseman's picture

 

 

Barclays is like a casino boss who shakes down a winning blackjack player investor. Plummeting oil prices sent the value of their ETN plunging. Any short sellers were sitting on massive gains. The easiest way to prop up the price of something is to limit the supply. Barclays did exactly that, artificially inflating the price of the ETN, and crushing any shorts in the process.

Just say NO to ETNs.

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For many people, an important aspect of quitting gambling is to find alternate ways to handle these difficult feelings without gambling.  Even when gambling is no longer a part of your life, the painful and unpleasant feelings that may have prompted you to gamble in the past will still remain. So, it’s worth spending some time thinking about the different ways you intend to deal with stressful situations and the daily irritations that would normally trigger you to start gambling.

 

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Overcoming a gambling addiction or problem is never easy. But recovery is possible if you stick with treatment and seek support. To find help in your area, see Resources and References below.

 

 

http://www.helpguide.org/articles/addiction/gambling-addiction-and-probl...

firstdivision's picture

I've had people that complain that derivatives are all that is evil with the world of finance, then get on the phone with their broker to buy USO/SPY/QQQ/XIV/etc./etc.

Manthong's picture

Lampost + Hanging Banker = 1st step to recovery

Escrava Isaura's picture

 

 

The wide premium developed

limited how many new shares could be created

inhibiting the normal mechanism

ETN's price in line with its index. 

The gymnastic of the English language to make our financial frauds sounding ‘digestible/realistic’ it’s something that bugs the mind.

I CAN NOT see a regular person committing such atrocity of the English language with the sole purpose of lying and misleading. It takes a high level of indoctrination to the point of believing it. Otherwise, you just couldn’t do it.

Fish Gone Bad's picture

It takes a high level of indoctrination to the point of believing it.

When people are paid to believe something, they will.  No matter the evidence. If one were to add a fire-starter material like politics/religion to the mix, then all opposition to an idea could be squelched.  As an example,  at one time carbohydrates were referred to as fattening carbohydrates, now they are "healthful" and the base of the food pyramid. They are prescribed for the very epidemic they cause.

NoDebt's picture

I hate to ask rhetorical question, but is that even LEGAL?  Isn't creating new units based upon demand sort of the basic operating principle of every open-end fund/ETF/ETN since the beginning of time?

 

Dr. Engali's picture

Legal? Lol..., you're hitting them on all cylinders today.

jcaz's picture

Just shows how clueless the regulators are-  Barclays and their ilk are playing a game the SEC isn't familiar with.   Tomorrow there will be a copper ETN,  then next a condom ETN-  move the money faster than the regulators can keep up,  create artificial bubbles to pop.

A quality Ponzi,  created by the kids who brought us financial engineering.

aVileRat's picture

Yup. Indexing and slippage has played a major part in every over-correction going back to 1929. But don't hold your breath that Vanguard or Blackrock will ever be called in for a House testimony on how slippage & liquidity shortages accelerate market crashes.

 

Cognitive Dissonance's picture

It depends upon whom you are cheating and who is making a killing.

For you and I....illegal. For those who make the rules....completely legal and actually encouraged via bonus.

Winston Churchill's picture

Remember the RMBS Titanic ?

Playing hide the Note ? The phoney REMICs ?

What makes you think ETF/ETFs work any different way.

The harsh jail sentences all the bankers got ?

Oh wait.....

firstdivision's picture

DOJ Algorithim

 

                Are you a Large Bank
                          |
                          | 
                          |
            No______|_______Yes
            |                             |
            |                             |
          Yes                          No

vegas's picture

Take a good, hard look at my shocked face. 

 

www.traderzoo.mobi 

deKevelioc's picture

As Paul Criag Roberts has said, there is no rule of law anymore.  It's every man for himself.  Live by your values, not laws.

herkomilchen's picture

I think a more accurate view is that the rule of government law is as strong and pervasive as ever.  And that law is bought, sold, and used to profit like any other good in any other market.

No matter how skilled or creative, a person cannot out-compete or out-innovate someone else backed by state guns, so the basis of competition shifts to getting the law on your side.  These days the state is embedded in every productive sphere that matters and in so doing by nature creates powerful artificial advantage that someone will always step up to buy and use.

Accordingly, anyone earning any money to speak of these days directly deals in this shadow market or indirectly relies upon those who do whether he likes it or not.

Cognitive Dissonance's picture

"Until the SEC gets a clue..."

The author (not Tyler) still believes in the rule (and enforcement) of law. Hilarious!

herkomilchen's picture

Right.  Such a mindset presumes if only we had more and better regulations with more active central planning and control over the market for issuance of securities, then such problems would be fixed.  Total fail to understand root cause.

Pheonyte's picture

"Why the SEC still allows ETNs to be sold to the average investor remains a mystery."

They forgot to add "/sarc"

two hoots's picture

"In loving memory of when I used to care" (from a t-shirt)

Calculus99's picture

Simple rule of life -

ANY AND ALL COMPLEX FINANCIAL PRODUCTS DEVELOPED BY INVESTMENT BANKS ARE ALWAYS FOR THEIR BENEFIT NOT YOURS.

Now you know why they call many of their customers 'valued clients'... 

Rainman's picture

And then there's GLD

Jus7tme's picture

What about GLD, exactly?

i8emallup's picture

I wonder if zh dream date Kyle Bass knew this when he shamelessly flogged OIL on wall street week. 

Love those pump and dumpers, isnt it.

Albertarocks's picture

I'm pretty confident Bass is not one of "the inner circle".  I'd like to think he's a responsible fund manager who is right damned near every time simply because he's a hell of a lot smarter than the pigs who actually run the show.  In his last interview Bass also stepped up to the plate and admitted that he had been wrong on one call, and shared in the losses just like his clients did.  And he made that money back to boot.  If he shamelessly flogged oil I would say "good call".  Why you're busting his balls is something I don't understand.  Mofos like the bankers, sure, I doubt anybody wants to see their heads on spikes any more than I do.  In fact, that very thought gives me great incentive to live decades longer than the average human being should.  I want to see them hang and I refuse to die until I see it.

Calculus99's picture

"Why the SEC still allows ETNs to be sold to the average investor remains a mystery."

There's only a mystery if you think the regulators are there to keep an eye out for Joe Public.  

Since1929's picture

Of course, I got the prosepctus on this thing a cupla weeks ago when I bought some.  Avg cost 7.5 . 

It was like a telephone book.  The recycling guys were happy I'm sure. 

So maybe now it can get manipulated up ... just like regular oil?   Why the hell not ??  

katchum's picture

This ETN should change its ticker symbol so that average Joe won't buy it.

slightlyskeptical's picture

I always thought the creation and termination of units was why the ETN were such crappy investment vehicles in the first place. I have no issue with Barclays over this.

Jus7tme's picture

ZH missed the opportunity to explain the difference between an Exchange Traded Fund (ETF), and an Exchange Traded Note (ETN). One of ZH's greatest weaknesses is that it throws around jargon that is undefined or ill-defined. Often the whole point of a ZH story hinges upon some fine detail of some definition, and the story is worthless or misleading unless you understand the term.

Can ZH please do better? I realize this particular article was sourced from outside ZH, but is it too much to ask that ZH editors step in and add a little editorial value along with the articles they publish?

 

 

paulbain's picture

 

 

 

I agree, and that is why I sometimes use, e.g., SeekingAlpha.com (SA) or InvestoPedia.com.  SA is nowhere near as good as ZH, but it certainly has utility.

 

 

 

Temporalist's picture

Go find the internet and do it yourself without whining so much

Joe Sixpack's picture
Fed is Swapping Zero Interest Rates for Cheap Oil; Turmoil in Markets Result

 

JohnQPublic

1/20/2016

(Before It's News)

Stock markets are in a panic selling mode as we speak. There are real issues out there, such as China’s economy and plummeting oil prices. Cheap oil is good, right? Well why are the financial pundits complaining about it. I believe it is because the banks are still leveraged up on derivatives, and the rapid change in oil prices could cause them to collapse. Zerohedge has even reported that the Dallas Fed told Banks to suspend mark-to-market for energy loans four days ago. We are told oil is dropping because of lack of demand (China), to punish Russia, Saudi refuses to decrease production, etc.

I would like to propose another reason: The Fed need to raise interest rates. It cannot do that without collapsing the derivatives bubble. Unless, that is it can find a substitute for zero interest rates. Could $10/barrel oil be the ticket? If true, at this point, the first prick in the derivatives bubble has been applied by the Fed, and the corresponding collapse of oil prices is occurring. Is it getting out of control? Can the Fed control this process? Only time will tell.

Another Issue Occuring Right Now:
Trump, Clinton, Lawrence Krauss, Jeffrey Epstein and Copernicus in 2016

juggalo1's picture

I don't understand how the ETN structure is supposed to work vs. ETF.  In an ETF if the security deviates from the underlying, there is a profit incentive to close the gap.  But for the ETN?  What's the incentive?  The bank kind of has unlimited liability to create or cancel notes at the underlying price.  Now if it becomes difficult or unwieldy to offset their exposure (or if they just don't feel like doing it), what is their incentive to maintain the peg?  In fact they seem to have an incentive not to, as they could time when they were going to allow a deviation, and then bet on the deviation closing.  What is to prevent them from doing that?

Greater Fool's picture

The issuer has discretion to create notes, but not to retire them. Investors can redeem them with the issuer or hold them to maturity, but the issuer can't retire them otherwise except by buying them on the open market and keeping them out of circulation.

The short answer to your question about incentives is that, at redemption or maturity, the issuer is obligated to pay out the index performance no matter what the market price of the note is. So obviously they don't want to be underhedged at a time when they may be forced to pay a premium over and above whatever assets they hold to back the note.

So to a first approximation anyway the issuer bears risk of tracking error in an ETN, whereas the holder does for an ETF. There also aren't the same restrictions on who can redeem that exist for ETF's, although there are minimum position sizes, restricted dates, and fees associated with early redemptions of an ETN.

Greater Fool's picture

Same happened to CS's TVIX ETN way back in 2012.

It amazes me that "normal" investors trade in these things without looking at premium/discount to NAV, or checking intraday indicative values. They don't seem to know that even if it says "Coca-Cola" on the label, you may open it up and get a mouthful of gasoline.