Thursday, February 10, 2011

Stripping for the common man

Hacking an ATM

Hacking an ATM © fintag

News comments:
You know me, I get bored easily. I am nosey too and like to understand how people hack into ATMs, why Katy Perry married Russell Brand or how inside traders made an illegal buck out of using ETFs.

ETF's started out a few years ago and made BGI stock holders very rich (including Bobby Geezer). They have morphed from index funds to anything-goes-funds. They have transformed access to funds and baskets of assets and are so popular that indices are becoming more volatile (When an S&P500 ETF becomes so big it becomes a constituent of the S&P500 we should all get worried). Regulators love them because they are listed and liquid and mom and pop won't get burned. They are low in fees and are great replicators and allow for easy index-like benchmarks. But like all new ideas, there have been people looking to abuse them (UCITS III being a classic example - you can only invest in unlevered, liquid, long only assets like ETFs - except inside them who knows what is going on: ask Lxyor, they might tell you) and it has taken some hedgies to do just that.

You see smart people who get bored too much can be a dangerous thing. That is why I spend most of my time with my arms crossed.

The SEC maybe slow, and I have been critical of their efforts in the past (the FSA too) but with everything being logged electronically, hiding is more difficult. We are human and our ego's get in the way. When I send a BBM, I don't ever think that one day it will be on show to the world. Check out the sales of fax machines or edible paper. They are on the up.

Anyway, ETF Stripping is the new way of disguising inside trades. Its not new - basket option traders were doing this in the 1990s. Going long an ETF and shorting some of the constituents is a great trade and if anyone asks why you left them out, well its the models stupid, not the tip received on inside-trading-forum.com.

ETFS - Easy Trades For Stripping (Barrons / Financial Times)

Today's shorts:
Citi - inside trading (thestreet)

Mervyn King and the Clowns (bloomberg)

Today's longs:
13 things I cannot explain (impactlab)

Gossip:
Funds of ETFs to be the new thing for 2011.