These ETFs Are Parasites on the System

 | Sep 16, 2011 | 7:15 AM EDT
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Wait one minute. A rogue trader at UBS lost $2 billion trading ETFs vs. underlying stocks with derivatives? That's what the unauthorized trades were about?


Typical of what we don't know about these instruments. Typical of the confidence that securities people place in the way ETFs work vs. the actual securities they are supposed to represent.

If a major firm like UBS, with all sorts of risk controls, couldn't see through what a trader might have been doing as he flitted back and forth through the ETFs to the underlyings to the options market, are we really supposed to be able to trust these kinds of desks when they tell us not to worry and that ETFs aren't more powerful than the stocks?

Should we really trust them when they make their assurances that the ETFs, particularly the double and triple ETFs, don't impact the markets in bizarre and difficult to understand ways, including exacerbating trends that shouldn't be exacerbated?

We've created a ton of financial instruments of late that are allegedly supposed to give individual investors a chance to trade anything with the same leverage that hedge funds have. This is the super-democracy movement of allowing the little guy to make intraday bets against or with indices using tremendous leverage; bets that pretty much need to be taken off each day because they don't really work as long-term hedges.

No matter that most of the people who use these and call into my show have no idea that they don't work as long-term hedges. No matter that they are too big and powerful vs. the whole market, not just their sectors. The creators have sold the SEC on the idea that these are terrific, ingenious instruments.

To me, the fact that someone could hide $2 billion in losses on the Delta One desks shows that not only do the promoters of this nonsense make claims of innocence about their impact, they don't even know how they work.

There are many reasons why individuals hate this market, but one of the major ones is that the products they have been sold, mainly these ETFs, are just ways of betting on teams that have nothing to do with investing. They don't level the playing field, they distort the playing field and, as you can tell from the spate of articles about this rogue trader, there are big desks that every day ensure that every nook and cranny gets exploited, to the detriment of the overall market and even to the detriment, we now learn, of themselves.

They are here to stay. They are parasites on the system. They are blessed.

They are another reason to hate the market. But let's use UBS as Exhibit A in the case against the promoters of these who say "don't worry about them."

Even they, the big exploiters, have no idea how they work, or you couldn't hide the loss. It would be one thing if the promoters just came out and said "we are issuing these securities so big trading desks can make lots of money" instead of saying they offer the variety of choices that the little guy wants.

But, no, they cloak themselves in goodness.

Someone, someone please tell me why we have to have these other than for desks to make minute amounts of money at the expense of the market.

Maybe the rogue UBS loss will shed more light on what the heck we are doing with these products. And make the defense of them more naked as we now know that the Delta One desks rule, and rule, in this case, with abstruse abandon.



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