First HFT, Now ETFs: The SEC Slowly Wakes Up From Its Porn Slumber

A few days ago we learned that the SEC was either objectively going after every single HFT shop by demanding frontrunning blueprints, or it was merely pandering to the requirements of GETCO, which is in dire need of eliminating some of its more profitable competitors. Now, the WSJ informs that the same porn-addicted regulators are going after ETFs: yet another market product that the enforcement regulator, in its multi-year long career-enhancement focused hiatus, has totally forgotten about and is finally starting to realize has more of an impact on the market than virtually anything else currently in the trading domain. The skeptics will say that this is nothing but ETF giant Blackrock stretching its wings and making sure it doesn't have to share the spoils of frontrunning war with anyone. Whether that is the case, we will find out soon enough, in the meantime we learn that the SEC is "looking into whether turbocharged exchange-traded funds amplified August's topsy-turvy swings in the stock market." Apparently years, because it is no longer months, after the flash crash, the SEC has realized that the convexity and gamma brought about by HFTs in the ETF space merely adds leverage upon leverage, sending the market into spasms of unnecessary but inevitable bouts of momentum chasing: "SEC officials are zeroing in on "leveraged" ETFs, which amplify investor bets, often through derivatives. Derivatives are financial contracts with values linked to another asset. The funds typically offer double or even triple the return of an index, such as the Standard & Poor's 500-stock index." Soon enough, we dread to think, the SEC may also realize that it has absolutely no clue about market topology and structure, nor how anything actually works in modern markets. But since the response by the midget porn fanatics will take years if not decades, we doubt anyone is too concerned. After all Keynesianism itself has at best one, maybe two summers left. Max.

From the WSJ:

ETFs, which typically track market indexes, trade on exchanges like stocks. Exchange-traded funds have surged in popularity and now generate 35% to 40% of exchange trading volume, according to Morningstar Inc. Such funds sometimes are used by high-frequency traders, who buy and sell stocks and other assets at a rapid clip, making money on small moves.

 

The SEC inquiry into ETFs is part of a broader look by regulators into exotic trading vehicles and high-frequency trading. The SEC voted last week to open up a public dialogue about the use of derivatives by mutual funds and ETFs, among other things.
Some critics have long said the high-octane funds can intensify market volatility, because ETFs often reflect moves in a number of securities through a single trade, in contrast to individual stocks.

 

Numerous high-speed trading firms posted high profits during the August volatility, according to traders.
While popular with high-frequency traders, leveraged ETFs also are increasingly traded by individual investors. The ETFs can magnify profits, but they also raise the risk of big losses. Leveraged ETFs are primarily intended for short-term day trading and often miss their mark on returns if held for longer periods. 

 

...

 

If the market makes a big move in overnight trading or during regular trading hours, ETF market makers must buy or sell large chunks of underlying assets during a short period. The moves can be worsened by other investors trading in anticipation of a rebalancing.

 

"It is not only during the open or close but also during the day," Mr. Peterffy said in an interview. He said he told SEC officials that "many high-frequency traders go with the momentum by [trading ETFs] in the direction the market is moving."
ProShares, a unit of ProFunds Group, which says it is the world's largest manager of leveraged and inverse funds, declined to comment. 

 

More than "half the volume on the exchange is high-frequency trading, and ETFs have become the vehicle of choice for high-frequency trading," said Robert Litan, vice president for research and policy at the Kauffman Foundation. Mr. Litan has written about the risks posed by leveraged ETFs.

Heaven forbid the SEC finally comprehend that ETFs, especially those favored by HFTs, are nothing but the latest iteration of synthetic (squared/cubed) CDOs, whose purpose is simply to wag the dog, courtesy of massive leverage, which makes the underlying impacted by the moves in the synthetic.

Of course, should the SEC actually do something about ETFs, that will make Larry Fink very angry. And the last thing the SEC wants is to anger the guy who runs Wall Street from the shadows.

Which simply means that like with everything else, the best resolution is not an attempt to intervene, which will inevitably fail, but to let Wall Street finally cannibalize itself: a process which will also coincide with the much overdue Great Reset, which we have been since inception, is the only possible resolution to to the dead end Western society finds itself in currently.

h/t Manal