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.
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:
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.