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[EquisMetaStock Group] Re: ETF trading may cause Volume Indicator Problems



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Well this has certainly become a hot topic!

Let me at least weigh in with some thoughts on ETF's and volume. 
Unfortunately, the views that I have seen expressed were directly 
related to a commodity rather than a stock. I'll try to summerize 
here rather than giving the details.

Basically the market was that of silver and the concern was that the 
ETF's would artificially inflate the amount of silver on hand at any 
given time. Initially no one paid much attention to the effect that 
the ETF's would have on the market. When Warren Buffet got burned 
everyone took notice. The story that I read was that Buffett had 
bought a sizable quantity of the commodity and was using it much as 
a cash cow and selling options on his position...nice if you can do 
it and Buffett certainly can. As it turned out Buffett had sold some 
calls fully expecting the price to plummet. When the ETF's finally 
had to go to the market to secure their positions, the price sky 
rocketed and Buffett had to sell. 

The effect that the ETF's had was to artificially inflate the amount 
of silver available and subsequently drive up the price of the 
commodity. Would this same type of fiasco happen again? Probably not 
but for me its proof enough that I really want to be cautious about 
the type of indicators that I'm willing to throw at any set of price 
data,whether they be stock, ETF, or commodity. What I'm going to do 
is select a good group of TA indicators. Indicators which I fully 
understand and appreciate. Then and only then will I make my trading 
decisions. As always the rules of good trading are just as important 
here as they are anywhere...always use good stops.


Preston

 


--- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxx> 
wrote:
>
> Personally, I like ETFs. I use them as asset allocation tools, and
> occasionally I trade them. The lower volume ETFs are a little 
tricker
> to trade. Most of the time, they should be bought and sold using 
limit
> orders so there is no momentary price distortions caused by lag as 
the
> specialists tries to buy the securities needed to create more 
shares
> of the ETF. 
> 
> There can also be a large gap between the NAV and the market price 
of
> an ETF. They are not perfectly matched to the market prices of the
> underlying securities. The gap is often greater than the expenses 
of
> the ETF and it can be positive or negative. Some ETFs trade more 
like
> closed end mutual funds than they do index funds.
> 
> My biggest complaint with ETFs is the lack of shares for shorting.
> Only the largest volume ETFs have enough shares in retail accounts 
> available for shorting. Mutual funds, hedge funds and institutional
> traders dry up the shorting market because they use the shares as
> hedges. The ability to short sectors quickly and easily without the
> uptick rule was one of the big advertising points of ETFs. 
> 
> In the past when I was trading ETFs more frequently and I wanted to
> short many ETFs, I had to call the trading desk of my dealer and 
have
> them borrow the shares from institutional accounts, rather than 
from
> retail accounts. While that works, it also creates slippage issues 
in
> fills. It's a real pain. Most individuals look at the ahares 
available
> for shorting on a website, or call their brokerage and are told 
there
> aren't any shares available for shorting. 
> 
> There are lots of ETFs coming out every month. Anyone who is
> interested can track most of them on www.amex.com  select ETFs from
> the left column.
> 
> In addition to finding out what a new ETF is all about, once they 
been
> on the market for awhile, someone can scroll around on the amex 
site
> and find a list of the shares that comprise any ETF. That creates
> other kinds of trading opportunities.
> 
> ETFs are quickly replacing basket trading. Many people will buy and
> sell ETFs but they would not have created the same opportunities 
using
> basket trading techniques. So from that perspective ETFs are
> definitely changing things.
> 
> What I was pointing out about the article and the volume issues is
> traders need to be aware that ETF buying and selling causes the 
volume
> of both the good and bad performing stocks in the ETF to rise the
> same. On the surface this looks like a net zero impact, but it's 
not. 
> 
> Essentially as there are more ETFs and as ETF volume rises, traders
> will have to change how they look at volume because the volume of
> poorly performing stocks are going to rise also because the poorly
> performing stocks will be bought as part of the ETF creation. The
> volume of poorly performing stocks will be rising while the price 
is
> falling. The degree the price would have fallen due to selling
> presures may now be offset by the buying that is necessary to 
fulfill
> ETF demand. Some may consider this a distortion in the demand for
> weaker stocks. 
> 
> Volume today has a completely different meaning than it did 20 
years
> ago. Many TA volume tools were created 20 years ago. Data suppliers
> like Reuters need to supply the actual up and down volume rather 
than
> simply total volume. That would be a good place to start. 
> 
> Almost all TA tools are based on price and volume. There is only so
> many ways to analyze price and volume. The information which can be
> extracted from price and volume is limited. As volume becomes more
> difficult to discern the usefulness of it may decline meaning that
> most information will have to be extracted from price alone. 
> 
> The question is without rational gaps in the efficient market, or 
the
> creation of distorted gaps that are hard to read, how much 
opportunity
> will there be for in the future for individuals to profit from the
> efficiency gaps?
> 
> If these gaps close, then the market has reached random walk
> territory. Most of the academic studies do not include data on the
> current market. Often the studies are dated to the 1980's and 
1990's.
> ETFs weren't around then. 
> 
> Ten years from now, what will the new academic studies say? 
Financial
> engineering is creating new products faster than individuals can 
learn
> to use them and faster than academics can measure their impact on 
the
> markets. 
> 
> It's not that traders need new TA tools. There are thousands of TA
> tools and the vast majority have little or no value. Traders need
> differentiatable data to apply the tools to, or create tools that 
use
> the data effectively. On most services right now traders get to
> download high, low, open and close price and total volume by bar. 
> 
> Is that going to be enough to make TA useful in the future, or will
> the change in product and the expansion of the fund industry and
> institutional buying and selling diminish the value of the tools?
> 
> Will traders have to focus on the shares of companies that are off 
the
> ETF, fund and institutional radar? How many companies will that be 
as
> ETFs expand to cover every kind of basket someone can think of?
> 
> 
> 
> 
> --- In equismetastock@xxxxxxxxxxxxxxx, "jawjahtek" <jawjahtek@> 
wrote:
> >
> > super,
> > 
> > I agree that too many ETFs are being created and that narrow 
sector 
> > ETFs can distort some market sectors. 
> > However, I cannot tell from your post if you are against all 
ETFs 
> > and/or if you are a supporter of Random Walk theory.
> > ETFs in market segments with significant market cap have little 
> > impact compared to institutions and hedge funds.
> > And even the most ardent academic supporter of Random Walk 
thoery 
> > agrees that the original version of the theory is wrong.
> > My take from the article cited below in that some ETFs in narrow 
> > market sectors are distorting volume as an indicator.
> > But institutions and hedge funds have been causing the same 
> > distortions for years; why point out ETF impacts without 
mentioning 
> > the impacts of institutions and hedge funds.
> > I'm sorry if this appears to be a rant; for some reason CNBC and 
some 
> > commentators have been ranting about ETFs during the latest 
market 
> > downturn even though ETFs had absolutely no impact on the 
computer 
> > glitch in the Dow.
> > 
> > Ross
> > 
> > 
> > --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist 
<no_reply@> 
> > wrote:
> > >
> > > Anyone trading small caps might be interested in an article in 
> > today's
> > > Wall Street Journal 3/9/2007 which discusses how ETF trading is
> > > distorting volume and may hurt volume as a technical 
indicator. 
> > > 
> > > The article is in the Money Section. ETFs Build Presence in 
Shares
> > > 
> > > http://users2.wsj.com/lmda/do/checkLogin?mg=wsj-
users2&url=http%3A%
> > 2F%2Fonline.wsj.com%2Farticle%2FSB117340540305631813.html%3Fmod%
> > 3Dtodays_us_nonsub_money_and_investing
> > > 
> > > Most people do not understand ETF volume, the impact ETF 
volume has 
> > on
> > > individual share volume or individual share prices. They think 
ETFs
> > > are priced on supply and demand and that ETF volume works the 
same 
> > as
> > > the volume of ordinary stocks. In addition, there are 
differences in
> > > how mark to market pricing is done on the trading exchanges. 
> > > 
> > > Vomund explains some of this in his book ETF Trading 
Strategies 
> > Revealed 
> > > 
> > > There are also articles that explain bits and pieces on the 
> > internet. 
> > > 
> > > Specialized, or sector ETFs, are having the same impact on 
stock
> > > volume totals in individual shares in a sector or in a 
specialized
> > > area like socially responsible stocks. As the specialized ETFs 
grow 
> > in
> > > popularity so will their ability to distort the meaning of 
share
> > > volume and share pricing. 
> > > 
> > > When an ETF fails to achieve enough trading volume to cover 
its 
> > costs,
> > > the sponsor will liquidate it and cause the opposite volume 
issues 
> > to
> > > the downside.
> > > 
> > > All this will provide more support for Random Walk.
> > >
> >
>




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