It is no secret that the last few weeks saw massive liquidations along all asset classes. The result was a huge outflow across almost all products: Loans, HY Bonds, Municipals, Commodities... all a typical reaction to broad based liquidations. However, note we said "almost" - one class that actually posted a $6.2 billion inflow was equities. Yet not is all as it seems: peeking underneath the hood indicates that the bulk of this inflow, or $10.3 billion, had to do with inflow into ETFs... or rather, just one ETF - the SPY, accounting for $10.1 billion. Did someone prop up the entire equity market last week by massively pushing capital into the most liquid equity proxy available?
The plot thickens: as Bank of America points out: "The number of SPY's shares outstanding rose by 5.3% on Thursday and Friday of last week (May 6-7th), at the time when S&P 500 was trading lower on both days." BofA asks: "The question then becomes if this large intake into SPY was a part of the rogue trade that took place on Thursday, May 6th, or was it part of bona-fide rush by investors to buy equities at their lows...This suggests to us that the inflow into SPY, and by extent the overall equity category, was at least partially attributable to that trade dislocation. Potentially, some form of market-making activity closing on divergences between shares, ETFs, and derivative instruments may have been responsible for positive net interest in SPY." That, or is this the biggest faux pas ever conducted by the "invisible hand" which openly flooded the market with $10 billion in the form of ultra liquid SPY, at a time when massive derisking was taking all single names lower. A much more relevant question according to Zero Hedge, is whether there is any sense trading single names anymore - all the action is now in the form of index equity proxies now that liquidity in single names is virtually non-existent: this means trading only SPY and ES. Was last week's freak occurrence a huge ETF rebalancing, an implosion in one or more market neutral funds, which were forced to cover billions in SPY shorts as single names were being sold off en masse, or was this merely a direct intervention into equities by the Federal Reserve? We are confident that the SEC will immediately rush to answer all these questions and will have a definitive conclusion within a week.