WEBVTT - When ETFs Stop Working 0:00:05.840 --> 0:00:14.200 Welcome the Trillions. I'm Joel Weber and I'm America Cultures. Eric. 0:00:14.200 --> 0:00:17.799 Where you coming to us from today? I am live 0:00:17.920 --> 0:00:21.319 from the thirtieth three station in Philadelphia, Uh, famous for 0:00:21.480 --> 0:00:24.200 when they see film the last scene of Trading places. 0:00:24.880 --> 0:00:27.120 UM actually on my way up to New York or 0:00:27.120 --> 0:00:30.480 a client panel discussion at three thirty. And this is 0:00:30.520 --> 0:00:32.600 the only way we can pull us off to accommodate 0:00:32.680 --> 0:00:36.440 the great Katie Garifeld. So in the first you're gonna 0:00:36.440 --> 0:00:39.080 be sitting on the ground at a train station for 0:00:39.159 --> 0:00:42.960 us as we record trillions where it's really like the 0:00:42.960 --> 0:00:45.279 world is in war mode right now, Eric, if if 0:00:45.320 --> 0:00:48.040 you're if, it's come to this UM, and there's some 0:00:48.080 --> 0:00:51.159 significant events that have been happening in ets that we're 0:00:51.159 --> 0:00:55.360 going to talk about on today's episode. What's been happening? Yeah, 0:00:55.440 --> 0:00:57.760 it's been pretty wild. Like you know, e T s 0:00:57.800 --> 0:01:00.520 are are like cockroaches. I mean, they can trade through anything, 0:01:00.920 --> 0:01:03.880 and they have even when the underlying is frozen. But 0:01:04.680 --> 0:01:08.240 we had a situation with Russia where the underlying was 0:01:08.319 --> 0:01:12.520 frozen effectively and then also the e t F stopped trading. 0:01:12.959 --> 0:01:15.559 That's a new one. We've really never seen that before. 0:01:16.160 --> 0:01:18.840 It's really an important one to discussed because where does 0:01:18.840 --> 0:01:21.959 the sleeve investors and what should you think about going forward? 0:01:22.040 --> 0:01:24.319 And then the other one is b x X, which 0:01:24.400 --> 0:01:29.679 is a fixed et N, which is Barclay's halted creations 0:01:29.720 --> 0:01:33.000 on that which it's still trades, but without creations, arbitrage 0:01:33.080 --> 0:01:35.240 is basically destroyed. And so the price d v H 0:01:35.319 --> 0:01:37.520 and the n A V and that causes problems and 0:01:37.560 --> 0:01:40.119 that we've seen before. That's sort of a classic. I'm 0:01:40.160 --> 0:01:42.440 a big bank, I don't feel like offering this anymore. 0:01:42.520 --> 0:01:45.199 Let me just all creations and that's annoying. I think. 0:01:45.560 --> 0:01:47.400 I think there are two different situations, but they both 0:01:47.400 --> 0:01:49.800 speak to this idea of when the E t F 0:01:49.920 --> 0:01:53.560 stops uh doing what it does and I wouldn't say 0:01:53.600 --> 0:01:56.360 broken is the right word, but becomes impaired. Uh you know, 0:01:56.640 --> 0:01:59.680 how does that work? What happens? Joining us will be 0:01:59.800 --> 0:02:03.320 Key d Grindfield of Bloomberg News. She's also the co 0:02:03.400 --> 0:02:06.840 host of the newly launched relaunched E t F i 0:02:06.960 --> 0:02:10.239 Q Show as well as David Nodded with E t 0:02:10.400 --> 0:02:15.880 F Trends, this time on trillions. When E t F 0:02:16.040 --> 0:02:22.320 s stop working, Katie Dave Welcome back to the program. 0:02:22.360 --> 0:02:24.440 Thanks for having me, Thanks for having me too. I 0:02:24.480 --> 0:02:27.720 feel bad, Eric that you had to change things around 0:02:27.760 --> 0:02:32.000 to accommodate me because I don't have a lot of answers. Listen, 0:02:32.000 --> 0:02:35.639 you're very busy, and you look I am happy to 0:02:35.720 --> 0:02:40.160 accommodate you. You just don't look comfortable. Well I'm not. 0:02:40.280 --> 0:02:44.000 I'm I'm sitting Indian style on marble and I'm about 0:02:44.080 --> 0:02:47.200 four feet from a dunkin Donuts kitchen. So but this 0:02:47.280 --> 0:02:50.919 is natural habitat for Eric. He kind of is back 0:02:50.919 --> 0:02:53.240 in the day. Maybe you're gonna have to stretch your 0:02:53.280 --> 0:02:56.080 hip flexors after. Can I just say one quick thing 0:02:56.080 --> 0:02:59.919 about dunkin Donuts pretty pandemic. I would get the same 0:03:00.040 --> 0:03:03.400 breakfast here and then two years pasted because the pandemic, 0:03:03.440 --> 0:03:05.519 and then, as you mentioned, e t F I two started. 0:03:05.680 --> 0:03:08.119 I came back here on Monday two years later, got 0:03:08.160 --> 0:03:11.040 the same thing and it was actually a hair cheaper. 0:03:14.320 --> 0:03:17.280 Although somebody asked me to weigh the food. I was like, 0:03:17.320 --> 0:03:19.320 come on, I don't think. I don't think they're doing that, 0:03:19.360 --> 0:03:21.520 but I think don't donut. That's why the popular I 0:03:21.520 --> 0:03:24.760 think they are able to be more efficient. But anyway, 0:03:24.840 --> 0:03:28.320 interesting tidbits there. I could say many things, and we're 0:03:28.360 --> 0:03:32.360 just gonna ignore that and move on. Um Katie, can 0:03:32.440 --> 0:03:35.240 we start with you what has been happening, because you've 0:03:35.280 --> 0:03:38.000 basically been on the front lines of the past few 0:03:38.200 --> 0:03:42.400 weeks as as all of these things have transpired, it's 0:03:42.400 --> 0:03:45.600 been pretty wild. I mean, it's been a roller coaster 0:03:45.640 --> 0:03:46.920 a few weeks, and I feel like a lot of 0:03:46.920 --> 0:03:49.360 the action has been centered on a bunch of e 0:03:49.440 --> 0:03:51.480 t f s that aren't trading anymore. All of these 0:03:51.600 --> 0:03:55.800 um US listed Russian focused e t f s. Obviously, 0:03:55.840 --> 0:03:58.680 the Van Neck Russia et F was sort of where 0:03:58.760 --> 0:04:01.800 all of this action was concentrated. But I mean, as 0:04:01.960 --> 0:04:05.280 Eric alluded to, none, none of these et fs virtually, 0:04:05.320 --> 0:04:08.760 I think that's correct, are trading anymore. But before that happened, 0:04:08.760 --> 0:04:11.880 I mean, you saw a lot of flows into these funds. 0:04:11.880 --> 0:04:15.600 It's unclear whether that was a create to lens situation, 0:04:15.600 --> 0:04:18.119 people trying to short it. You also saw options volume 0:04:18.200 --> 0:04:20.359 take off on a lot of these funds, including a 0:04:20.400 --> 0:04:23.240 fund I think it was a direction fund that announced 0:04:23.279 --> 0:04:26.960 that it would liquidate and it was a leverage fund. 0:04:26.960 --> 0:04:31.080 And you saw again options contracts just explode in volume, 0:04:31.120 --> 0:04:33.240 which we now know, and I'm sure we'll get into 0:04:33.680 --> 0:04:38.120 it's unclear whether those holders will actually be paid out. Okay, Eric, 0:04:38.240 --> 0:04:40.440 One of the e t F s that we want 0:04:40.480 --> 0:04:42.960 to focus on is called r s X, which is 0:04:43.000 --> 0:04:45.039 the van X Russia e t F. What happened with 0:04:45.080 --> 0:04:48.960 that one? Yeah, essentially actually RSX and all of the 0:04:49.040 --> 0:04:54.080 politic creations, that's not that abnormal. Back ten years ago 0:04:54.200 --> 0:04:57.480 the Egypt et F pltic creations, when the stock exchange 0:04:57.800 --> 0:05:00.400 was closed for like two months, we've seen the before. 0:05:00.480 --> 0:05:02.920 We figured, oh, they'll just trade through. But the difference 0:05:02.960 --> 0:05:06.680 here is this is serious government stuff sanctions. Also, the 0:05:06.720 --> 0:05:10.080 stocks stopped trading, the g d rs on those stocks 0:05:10.360 --> 0:05:13.400 stopped trading, and it became a much more like the 0:05:13.400 --> 0:05:15.839 e t F was thrust into a geopolitical situation, which 0:05:15.839 --> 0:05:19.440 it wasn't in the Egypt case. And so I'll actually 0:05:19.440 --> 0:05:22.000 turn over to Dave because what was different this case 0:05:22.080 --> 0:05:25.599 is the exchanges nicely and cbo E said we're not 0:05:25.600 --> 0:05:28.000 actually gonna get trade it either, and that was new. 0:05:28.040 --> 0:05:30.279 I've never seen that. Normally e t s trade through anything, 0:05:30.279 --> 0:05:33.680 even if the underlying is frozen, and nobody writes about 0:05:33.760 --> 0:05:37.800 mechanics and busted mechanics better than Dave, So I would 0:05:37.839 --> 0:05:40.159 like to get his take on just what he saw 0:05:40.240 --> 0:05:44.640 and what he thinks, uh, sort of happened behind the scenes. Well, well, 0:05:44.720 --> 0:05:46.599 Joel was sort of saying before we got started that 0:05:46.600 --> 0:05:48.440 you only have me on when the car crash happens. 0:05:48.520 --> 0:05:51.800 So it does feel a little bit like that. I mean, 0:05:51.839 --> 0:05:54.720 you're right that this time was very different, and really 0:05:55.000 --> 0:05:57.000 it comes down to the sanctions. I think if you 0:05:57.000 --> 0:05:58.800 want to trace it all the way back, it's not 0:05:58.920 --> 0:06:02.080 so much that the moss Go Exchange closed for business, 0:06:02.120 --> 0:06:04.640 because that's as you pointed out, that happened in Greece, 0:06:04.680 --> 0:06:07.719 that happened in Egypt. But in both those cases there 0:06:07.760 --> 0:06:11.320 was a really legitimate expectation that those markets would reopen, 0:06:11.440 --> 0:06:14.159 they might price differently, right, that the Arab spring could 0:06:14.160 --> 0:06:16.280 have gone a couple of different ways. But I don't 0:06:16.320 --> 0:06:18.719 think anybody was expecting that somehow, you know, all of 0:06:18.760 --> 0:06:22.240 the companies listed, we're going to disappear. What happened with 0:06:22.279 --> 0:06:25.560 the sanctions kind of created this, I think, this cascading problem, 0:06:25.640 --> 0:06:29.320 which is once it became impossible for the Russian companies 0:06:29.320 --> 0:06:32.960 to actually do business as securities anymore, meaning that they 0:06:33.000 --> 0:06:36.960 could pay dividends, that they could pay their their bond servicing, 0:06:37.000 --> 0:06:39.600 all of that stuff. When that became a problem, it 0:06:39.640 --> 0:06:42.280 was really just a ticking time bomb for when the 0:06:42.480 --> 0:06:46.320 LS the London Stock Exchange would effectively have to suspend 0:06:46.400 --> 0:06:48.880 the g d rs and the vast majority of Russian 0:06:48.880 --> 0:06:52.160 stocks that people trade trade in London as g drs, 0:06:52.200 --> 0:06:53.960 not in New York as a d r s, and 0:06:54.040 --> 0:06:57.279 not in Moscow directly. So once that happened, which was 0:06:57.320 --> 0:07:00.520 almost instantaneous, that in the early round of sanctions, that 0:07:00.520 --> 0:07:02.200 it was going to be impossible for these companies to 0:07:02.279 --> 0:07:06.599 actually do business as global public securities. UM. I actually 0:07:06.680 --> 0:07:09.560 think they've waited about a day late. I predicted on Wednesday, 0:07:09.560 --> 0:07:12.320 two weeks ago that they would actually um either delist 0:07:12.520 --> 0:07:14.760 or suspend the g d r s. They haven't actually 0:07:14.800 --> 0:07:16.720 delisted them yet. I think that will be the next 0:07:16.800 --> 0:07:19.480 you to drop, at which point those no longer become 0:07:19.520 --> 0:07:22.880 investible securities, regardless of whether the market reopens if they 0:07:22.880 --> 0:07:26.720 get delisted off the LC. So with no underlying security 0:07:26.720 --> 0:07:31.600 that anybody had faith in anymore, you know, pausing for 0:07:31.960 --> 0:07:34.320 halting creations and that you basically had to do that 0:07:34.400 --> 0:07:36.440 because there was no way to roll up a basket 0:07:36.480 --> 0:07:39.200 of securities anymore to do a creation and then the 0:07:39.280 --> 0:07:42.480 suspension of trading. That really comes down to the obligation 0:07:42.720 --> 0:07:45.960 of the exchanges themselves to ensure that they can make 0:07:46.040 --> 0:07:48.920 orderly markets. Right, That's that's there on the hook for 0:07:48.960 --> 0:07:52.080 that if they let something trade knowing that it's going 0:07:52.120 --> 0:07:54.440 to be you know, hitting the limit up, limit down 0:07:54.520 --> 0:07:57.680 every eight seconds all day long because nobody has any 0:07:57.720 --> 0:08:00.560 idea how to deal with pricing that is on exchange 0:08:00.560 --> 0:08:02.160 a little bit, so you know, we didn't get it 0:08:02.160 --> 0:08:05.280 completely synchronized. I think RSX closed for trading a day 0:08:05.320 --> 0:08:08.840 after E r U S. But but fundamentally you end 0:08:08.920 --> 0:08:11.600 up in the same position, which is you have uninvestable markets. 0:08:11.720 --> 0:08:15.240 That's what's different this time, Dave. And the pantheon of problems, 0:08:15.400 --> 0:08:17.320 which is sort of how I think about you. You're 0:08:17.320 --> 0:08:18.880 you're gonna be the red phone on the desk now 0:08:18.920 --> 0:08:22.160 for trillions and the pantheon of problems. Where do you 0:08:22.240 --> 0:08:27.160 rank this in terms of et F history? Oh predates right, 0:08:27.240 --> 0:08:29.560 So the last time we can point to anything like 0:08:29.640 --> 0:08:33.080 this um is either Cuba or ran both before you know, 0:08:33.120 --> 0:08:35.320 both in the seventies and eight in the sixties prior 0:08:35.360 --> 0:08:37.600 to that, um, which was the last time we actually 0:08:37.679 --> 0:08:40.000 had the opportunity to look at the market and say, 0:08:40.160 --> 0:08:42.040 this just might not exist when we get out the 0:08:42.080 --> 0:08:45.200 other side of this crisis. UM. Now, I actually don't 0:08:45.240 --> 0:08:47.280 think we end up in a world where they actually 0:08:47.320 --> 0:08:50.200 just obviate all foreign ownership in Russia. But that's on 0:08:50.240 --> 0:08:54.040 the table. They're already talking about taking over local assets 0:08:54.080 --> 0:08:56.560 of foreign companies that have pulled out. I think it's 0:08:56.600 --> 0:08:58.760 really just a matter of time before they say and 0:08:58.800 --> 0:09:02.520 we're also obviating for ownership of the of the companies themselves, 0:09:02.960 --> 0:09:05.960 at which point, literally those stocks go to zero, right, 0:09:06.000 --> 0:09:09.440 those properties get written to nothing, which is incidentally what 0:09:09.559 --> 0:09:12.240 happened in Iran, and it is what happened in Cuba, 0:09:12.280 --> 0:09:14.080 which were the only two times in history I guess 0:09:14.120 --> 0:09:17.080 nineteen seventeen and Russia again. Uh, those the only times 0:09:17.080 --> 0:09:18.720 in history that I know that this has happened. So 0:09:18.760 --> 0:09:22.040 it pre dates the et F structure. So if I'm 0:09:22.080 --> 0:09:26.640 a shareholder and I'm looking at that, this seems really bad. Yeah. Yeah, 0:09:26.720 --> 0:09:29.040 if you're sitting here with RSX in your SWAB account 0:09:29.160 --> 0:09:32.680 right now, Uh, the very very high likelihood is that 0:09:32.760 --> 0:09:35.439 you're going to get some very small percentage of your 0:09:35.440 --> 0:09:39.439 money back when RSX finally closes, when they finally liquidated 0:09:39.440 --> 0:09:41.880 it um, and you know it does have some cash. 0:09:42.000 --> 0:09:44.920 They did what they could to raise what money they 0:09:44.920 --> 0:09:47.760 could while those markets were still trading. But at the 0:09:47.840 --> 0:09:49.800 end of the day, the price you see, you know, 0:09:49.840 --> 0:09:51.840 the price you last saw, is pretty close to what 0:09:51.880 --> 0:09:54.880 you might get, probably even less. Uh. And you know, 0:09:55.000 --> 0:09:57.160 as we as you guys mentioned in the beginning, I 0:09:57.200 --> 0:09:59.240 actually can't even predict what they're going to do with 0:09:59.280 --> 0:10:03.680 the options market, because that's crazy, because the options market 0:10:03.679 --> 0:10:06.040 now has no way to settle. You mentioned a word, 0:10:06.040 --> 0:10:07.920 their liquid It's a big scary word, and I was 0:10:07.960 --> 0:10:10.560 going to ask, I mean, how does this end, these 0:10:10.640 --> 0:10:14.120 these e t f s where where trading has been halted, 0:10:14.800 --> 0:10:18.160 Can that be unhalted or do you see this ending 0:10:18.360 --> 0:10:21.760 eventually in liquidation. I only think that you'll see the 0:10:21.840 --> 0:10:25.199 Russian e t f s resume normal trading when you 0:10:25.320 --> 0:10:29.240 see the underlying markets resume normal trading. And I'm very, 0:10:29.400 --> 0:10:32.920 very skeptical that that's going to happen for US investors. 0:10:32.960 --> 0:10:35.680 For for a forty act fund um. I actually think 0:10:35.679 --> 0:10:39.080 it is more likely at this point that those markets 0:10:39.160 --> 0:10:43.600 become truly uninvestable, and that even should Moscow reopen, the 0:10:43.760 --> 0:10:46.200 London will have to delist all those securities on the 0:10:46.240 --> 0:10:48.959 GDR market and nobody's gonna want to own the underlying s. 0:10:49.000 --> 0:10:51.479 E R U S had a lot of the direct underlyings. 0:10:51.520 --> 0:10:53.200 They moved in the last couple of days to put 0:10:53.240 --> 0:10:54.559 more of the A d r s and g d 0:10:54.679 --> 0:10:57.000 rs on the books. But even if that reopens, at 0:10:57.000 --> 0:10:58.720 this point, it won't have I don't think we'll have 0:10:58.760 --> 0:11:00.560 those securities on the books any more. I think it'll 0:11:00.600 --> 0:11:09.319 be mostly cash. So let's say I hold r s X. 0:11:10.200 --> 0:11:12.439 A lot of people actually bought it after all this happened. 0:11:12.679 --> 0:11:14.480 Let's say they're training at three or four dollars. They 0:11:14.520 --> 0:11:16.880 bought it at five six whatever it was low. It 0:11:16.920 --> 0:11:19.400 was four months ago, so it's they're looking, Hey, it's 0:11:19.400 --> 0:11:21.599 a bargain you own that. E t F. Wouldn't you 0:11:21.720 --> 0:11:26.920 rather just have everybody sitting limbo until something gets resolved, 0:11:26.920 --> 0:11:29.320 even if that's two or three years, rather than really 0:11:29.320 --> 0:11:32.440 get nothing. Yeah, I don't think you'll see them just 0:11:32.679 --> 0:11:36.040 decide like next Thursday, to roll up the fund. I 0:11:36.080 --> 0:11:38.520 do think you'll you'll see both. I mean, really, we're 0:11:38.520 --> 0:11:40.480 just talking about black Rock and Van Neck here. I 0:11:40.480 --> 0:11:43.000 think you'll see them. Wait until there's a shoe going 0:11:43.080 --> 0:11:45.800 to drop right, whether either we you know, pass a 0:11:45.800 --> 0:11:48.439 piece of legislation that makes this permanent in terms of 0:11:48.480 --> 0:11:52.360 the sanctions, or Moscow does something to sort of obviate ownership, 0:11:52.559 --> 0:11:54.280 or the l s D lists all the g d 0:11:54.480 --> 0:11:56.800 r s, one of those kinds of events I think 0:11:56.840 --> 0:11:59.720 has to happen first. You're right right now, Today is 0:11:59.720 --> 0:12:02.440 not a day to close down this fund and hand 0:12:02.440 --> 0:12:04.679 everybody back a buck on their dollar, you know, you know, 0:12:04.720 --> 0:12:07.679 a buck on their fifty dollar investment or whatever's left over. Um, 0:12:07.800 --> 0:12:10.520 why why would you do that? So one thing I 0:12:10.600 --> 0:12:12.720 think is you need to be a little cautious of though, 0:12:12.800 --> 0:12:15.200 is I think the idea that these are somehow cheap 0:12:15.240 --> 0:12:18.200 lottery tickets is really dumb. Like I don't think that 0:12:18.240 --> 0:12:20.319 you can look at the price of gas Prom when 0:12:20.360 --> 0:12:24.320 it reopens as some universal lottery ticket, because all assets 0:12:24.400 --> 0:12:27.400 must eventually be worth something. I think we're seeing a 0:12:27.440 --> 0:12:30.960 big shift in the fundamental economic order that's going on. 0:12:31.040 --> 0:12:33.640 So I think that's a that's a bad call. Russia 0:12:33.760 --> 0:12:36.360 is not the land of meme stock, No, I don't 0:12:36.360 --> 0:12:41.040 think so. So on the lottery tickets ideas, I remember 0:12:41.120 --> 0:12:43.960 reporting on the fact that you saw that huge explosion 0:12:44.600 --> 0:12:47.320 both input and call volume, and it was described to 0:12:47.360 --> 0:12:50.520 me as just that cheap lottery tickets. And I mean, 0:12:50.559 --> 0:12:53.440 assuming that e t f s hadn't stopped working, I mean, 0:12:53.559 --> 0:12:56.880 especially for those put contracts, I mean it seems like 0:12:56.920 --> 0:12:58.880 they would have paid off though that actually that wouldn't 0:12:58.880 --> 0:13:02.520 have been such a bad lottery ticket. Oh and I mean, Eric, 0:13:02.559 --> 0:13:04.040 you wrote about this the other day, right, I mean, 0:13:04.040 --> 0:13:07.960 there's actually a fairly substantial put heavy position that's due 0:13:07.960 --> 0:13:10.880 to settle what tomorrow I think on Thursday. I think 0:13:10.880 --> 0:13:13.559 that's right, nineties six million dollars or something like that, 0:13:13.640 --> 0:13:15.920 most of it on the put side that that should 0:13:15.960 --> 0:13:17.839 be in the money, Like to your point, that should 0:13:17.840 --> 0:13:19.400 be a lot of that should be in the money. 0:13:19.440 --> 0:13:21.720 But because the o c C changed how they're doing 0:13:21.760 --> 0:13:24.000 the settlement where it's now I think has to be directed, 0:13:24.080 --> 0:13:25.600 meaning you have to go in and say yes, I'm 0:13:25.600 --> 0:13:29.440 willing to do I think a cash settlement on this um. 0:13:29.480 --> 0:13:30.720 I think there are a lot of folks that are 0:13:30.720 --> 0:13:34.199 gonna let these expire with the opportunity to have gotten 0:13:34.200 --> 0:13:37.360 money out of them, and and that's gonna that's problematic. 0:13:37.840 --> 0:13:40.400 That's not on like van AK, that's kind of on 0:13:40.440 --> 0:13:43.440 the O C C or CBO maybe, but like even there, 0:13:43.720 --> 0:13:46.440 we are in pretty untested territory. So I think it's 0:13:46.440 --> 0:13:49.920 tough to point fingers. By the way, Dave, you mentioned 0:13:49.920 --> 0:13:55.240 the Barclay's of UH fund. That's v xx and e 0:13:55.360 --> 0:13:59.880 t N. What's different about that circumstance than the rs 0:14:00.240 --> 0:14:02.920 X one. Yeah, so totally different way that E T 0:14:03.160 --> 0:14:05.320 s UM sort of broke down a little bit over 0:14:05.360 --> 0:14:08.600 the last couple of weeks, so um vxx for very 0:14:08.640 --> 0:14:11.520 different reasons. Vxx is an exchange trade note i E. 0:14:11.640 --> 0:14:13.880 It's a piece of bank debt issued by Barkley's Bank, 0:14:13.960 --> 0:14:17.680 tracking first and second month volatility futures. It's the most 0:14:17.720 --> 0:14:20.760 popular e T F where E T P I should 0:14:20.760 --> 0:14:24.720 say tracking volatility. It's sort of the traders darling sitting 0:14:24.760 --> 0:14:28.480 on about a billion dollars um and they suspended creations 0:14:28.520 --> 0:14:31.200 on it, which we've seen over and over again from 0:14:31.240 --> 0:14:33.840 E t N issue wers over the last decade um 0:14:33.880 --> 0:14:36.080 to the point where you know, I know you guys, 0:14:36.120 --> 0:14:37.920 now give it a you know, a red a red 0:14:38.320 --> 0:14:41.560 traffic light in every situation. Um. And this is one 0:14:41.560 --> 0:14:43.480 of the big reasons, because it is a little bit 0:14:43.480 --> 0:14:45.440 of you know, a fit of peak that the bank 0:14:45.520 --> 0:14:47.520 can just decide they have too much risk on the 0:14:47.560 --> 0:14:51.120 books and decide to stop issuing new shares, which causes 0:14:51.160 --> 0:14:53.480 premium spikes, which is exactly what we've seen in v 0:14:53.720 --> 0:14:56.480 x X. It's exactly what Credit Suite did to t 0:14:56.680 --> 0:15:00.520 VX uh basically a decade ago. Uh. And in that case, 0:15:00.560 --> 0:15:02.200 they just led a trade to a premium until they 0:15:02.240 --> 0:15:04.080 got comfortable again, and then they issued a whole bunch 0:15:04.080 --> 0:15:07.160 of shares out of inventory and in my opinion, somewhat 0:15:07.160 --> 0:15:10.760 feloniously probably booked the profit on that because they were 0:15:10.760 --> 0:15:14.280 actually issuing out of the market at a high price. UM. 0:15:14.760 --> 0:15:18.560 Let me jump in here, because uh, these banks, Uh, 0:15:18.960 --> 0:15:21.240 you're right, they do it almost when they want, and 0:15:21.280 --> 0:15:24.200 that's what's annoying. In this case. Barclays did give some 0:15:24.480 --> 0:15:27.720 logic they said, well, we've run out of issuance capacity, 0:15:27.760 --> 0:15:29.760 but if you look at the documents, they are not 0:15:30.200 --> 0:15:33.520 out of issuance capacity. They have plenty of runway left. 0:15:33.960 --> 0:15:37.240 And so some speculated it's about hedging costs some who 0:15:37.280 --> 0:15:40.760 speculated that somebody made a clerical error with the structure 0:15:40.800 --> 0:15:43.560 products and this is sort of part of that fallout. 0:15:43.920 --> 0:15:46.320 There's also a theory that it could be the canary 0:15:46.360 --> 0:15:51.040 and a deeper problem with their books. Uh, and somebody 0:15:51.080 --> 0:15:55.240 that management is just like, stop everything, what's your take on, 0:15:55.320 --> 0:15:58.040 what's really going on behind the scenes? Who pulled the 0:15:58.120 --> 0:16:01.320 plug and why? Well, so there are rumors on I 0:16:01.400 --> 0:16:03.040 mean I heard those rumors too, that there was sort 0:16:03.040 --> 0:16:05.080 of a blow up in some structure product issuance that 0:16:05.080 --> 0:16:07.720 had to get delayed. Um, and that puts some strain 0:16:07.880 --> 0:16:09.720 on the risk desk. And remember in the in the 0:16:09.800 --> 0:16:12.480 sort of a post Dodd Frank world, banks have to 0:16:12.480 --> 0:16:16.200 actually manage their overall risk pretty carefully. And so every 0:16:16.200 --> 0:16:18.680 bank has somebody whose job it is to pay attention 0:16:18.760 --> 0:16:21.440 to how much VEGA exposure do we have, right, how 0:16:21.480 --> 0:16:24.120 much long equity exposure do we have, how much international 0:16:24.120 --> 0:16:27.000 currency exposure do we have? And in most cases they're 0:16:27.040 --> 0:16:29.360 monitoring that literally in real time to make sure that 0:16:29.400 --> 0:16:32.440 the bank doesn't get over at skis SKIS because they're 0:16:32.440 --> 0:16:36.320 considered you know, important institutions by regulators around the world. Um, 0:16:36.400 --> 0:16:40.040 so it is not unlikely that somebody looked at their 0:16:40.080 --> 0:16:42.760 book and said, we have way too much long ball 0:16:42.800 --> 0:16:47.160 exposure on our book for the given volatility environment. Even 0:16:47.240 --> 0:16:49.560 though all of the E t N value of that 0:16:49.640 --> 0:16:52.480 was offset by an exactly equal liability in the E 0:16:52.560 --> 0:16:54.760 t N, that doesn't matter. That doesn't get to be 0:16:54.840 --> 0:16:57.760 counted because that's just considered short term paper on the book. 0:16:58.040 --> 0:17:00.240 So there's a lot there's an asset liability miss match 0:17:00.240 --> 0:17:02.880 in terms of how banks have to account for these things. 0:17:02.920 --> 0:17:05.359 So it's not inconceivable they just got over their skis 0:17:05.400 --> 0:17:08.639 on risk. The sort of canard they put up of 0:17:08.720 --> 0:17:12.040 well we ran out of share issuance, that does happen 0:17:12.160 --> 0:17:14.040 like I mean, we know for a fact, for instance, 0:17:14.080 --> 0:17:16.960 that US Commodities Funds ran into this on U s 0:17:17.040 --> 0:17:18.720 O and I think on U n G a few 0:17:18.760 --> 0:17:21.760 times where they literally just didn't file to issue new 0:17:21.920 --> 0:17:25.439 new shares. Unlike an e t F, a commodity spooler 0:17:25.480 --> 0:17:28.240 in E t N can only sell the shares it's 0:17:28.280 --> 0:17:31.600 it's actually registered with the exchange, and when they run 0:17:31.640 --> 0:17:33.600 out of those, they have to file for more and 0:17:33.640 --> 0:17:35.840 pay a decent amount of money. So every time they 0:17:35.840 --> 0:17:37.879 file for one of these extensions. It's like a hundred 0:17:37.880 --> 0:17:40.200 and fifty grand to put a bunch of new shares 0:17:40.280 --> 0:17:43.280 up on the books. Now, it's possible for them to 0:17:43.440 --> 0:17:47.399 reuse shares that have been redeemed, but most banks don't, 0:17:47.440 --> 0:17:49.880 and I don't believe either Credits Weeks or Barkleys does. 0:17:49.960 --> 0:17:52.240 So when we look at and say, oh, well, there's 0:17:52.240 --> 0:17:54.800 thirty three e t N three million e tns outstanding 0:17:54.800 --> 0:17:57.359 and they've got coverage for fifty the problem is if 0:17:57.359 --> 0:17:59.320 there has been a hundred million dollars in creations and 0:17:59.359 --> 0:18:02.000 a hundred million dollars and redemptions, they don't get to 0:18:02.080 --> 0:18:04.720 count that again, so they actually sort of use up 0:18:04.760 --> 0:18:07.080 only one side of the balance sheet when they're issuing. 0:18:07.400 --> 0:18:10.119 We don't actually know. You can't really impute it because 0:18:10.160 --> 0:18:12.720 the creation redemption numbers are net so we don't get 0:18:12.760 --> 0:18:15.200 to really see the creation redemption. We get to see 0:18:15.240 --> 0:18:18.679 the net um. But I suspect either they let that 0:18:18.720 --> 0:18:20.879 happen on purpose to get out of this business, or 0:18:20.880 --> 0:18:23.600 the risk desk turned them down. Something that caught my 0:18:23.640 --> 0:18:26.359 eye with this v x X situation is just the 0:18:26.440 --> 0:18:29.040 ripple effects that it could have for the volatility market, 0:18:29.440 --> 0:18:31.480 largely because I don't know. You might look at the 0:18:31.520 --> 0:18:33.280 size of v x x and say, okay, it's like 0:18:33.359 --> 0:18:37.280 nine million dollars. That's big, but it's not systemically big. 0:18:37.320 --> 0:18:40.080 But Goldman actually put out a note yesterday noting that 0:18:40.400 --> 0:18:42.840 if you look at the options market that surrounds v 0:18:43.119 --> 0:18:46.960 x x, uh the share a count of options is 0:18:47.240 --> 0:18:51.080 about or rather, the outstanding options on v xx are 0:18:51.160 --> 0:18:54.360 roughly six times v x x is actual share account. 0:18:54.440 --> 0:18:57.080 That is more than double the ratio of all but 0:18:57.280 --> 0:19:00.240 two e t f s, which is pretty amazing. Mean, 0:19:00.560 --> 0:19:03.800 it just speaks to that a lot of these volatility 0:19:03.800 --> 0:19:05.520 e t F c t N s, they're used as 0:19:06.080 --> 0:19:09.200 trading tools for a lot of these volatility players. And 0:19:09.480 --> 0:19:12.200 I mean what this means for the liquidity. I mean, 0:19:12.200 --> 0:19:15.400 how could that options market around vxx be liquid if 0:19:15.440 --> 0:19:20.000 this e t N isn't really trading or wears are halted, 0:19:20.359 --> 0:19:25.479 it's still trading, right right, So so the share creation 0:19:25.560 --> 0:19:27.560 just means that it's going to disconnect from its fair 0:19:27.640 --> 0:19:29.920 value and it's mostly going to trade at a premium. 0:19:30.240 --> 0:19:33.280 But to your point, you're right, like, the options complex 0:19:33.320 --> 0:19:36.120 around v xx is huge, and a lot of big 0:19:36.160 --> 0:19:40.120 hedge funds use that on a very dynamic basis what 0:19:40.160 --> 0:19:42.640 you're what, what you're seeing, if you're to monitor fin 0:19:42.760 --> 0:19:46.480 twit vol folks, the trader community there you're talking, you're 0:19:46.480 --> 0:19:48.480 seeing a lot of talking about moving to other vehicles, 0:19:48.520 --> 0:19:51.280 moving to other ways of expressing those opinions about VEGA. 0:19:51.840 --> 0:19:54.720 But that that options expiration cycle, both in the VXX 0:19:54.720 --> 0:19:57.280 and really in the spy options and and the and 0:19:57.400 --> 0:20:00.639 the in the futures, like that really impacts volatility in 0:20:00.680 --> 0:20:02.760 pricing right the voulu you know, the whole sort of 0:20:02.840 --> 0:20:06.720 vallpenning around opex is a very real phenomenon. It's less 0:20:06.720 --> 0:20:08.480 of an issue in the VIXED complex than it is 0:20:08.520 --> 0:20:11.920 directly in the underlying indexes. But you're right, like this 0:20:11.960 --> 0:20:14.119 is it's a lot of shifting around of where that 0:20:14.160 --> 0:20:17.000