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Sunday, April 26, 2009

Leveraged ETFs being front runned

A while back when I was hot on USO etf, it came to my attention that the pit traders where front running USO future contract buying/selling. This made USO lose value more than it should. It looks like the 2x and 3x ETFs are starting to be front runned now. (Trade ahead)

So be careful of FAZ, FAS, DXO, etc.

Quote from article: Further amplifying the ETFs' actions: Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 p.m. approaches. That enables hedge funds and other big investors to trade ahead of the ETFs. (click to read on).

The financial trading market in the US is a wonderful thing. As soon as "dumb money" enters the fray, the smarter and more nimble make money off of the "dumb money". To me, dumb money is where orders are placed in some sort of systematic way without the context of the events at that moment in time.

For USO, when that ETF closed out it's previous futures contracts, and bought the next months contracts, that set up people to trade around this automatic, LARGE, financial transaction. Now the same seems to be happening with the 2x and 3x ETF funds.

Unfortunately, there is no easy money in life. And the 2x and 3x ETF funds will have great returns still when the market really starts to move. But from reading the article above, it is clear to me the weekly/monthly/annual losses these ETF's will take because of people front running their orders will make them all losers.

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