Speaker 1: Welcome the Trillions. I'm Joel Weber and I'm America Cultures. Eric.
Speaker 1: Where you coming to us from today? I am live
Speaker 1: from the thirtieth three station in Philadelphia, Uh, famous for
Speaker 1: when they see film the last scene of Trading places.
Speaker 1: UM actually on my way up to New York or
Speaker 1: a client panel discussion at three thirty. And this is
Speaker 1: the only way we can pull us off to accommodate
Speaker 1: the great Katie Garifeld. So in the first you're gonna
Speaker 1: be sitting on the ground at a train station for
Speaker 1: us as we record trillions where it's really like the
Speaker 1: world is in war mode right now, Eric, if if
Speaker 1: you're if, it's come to this UM, and there's some
Speaker 1: significant events that have been happening in ets that we're
Speaker 1: going to talk about on today's episode. What's been happening? Yeah,
Speaker 1: it's been pretty wild. Like you know, e T s
Speaker 1: are are like cockroaches. I mean, they can trade through anything,
Speaker 1: and they have even when the underlying is frozen. But
Speaker 1: we had a situation with Russia where the underlying was
Speaker 1: frozen effectively and then also the e t F stopped trading.
Speaker 1: That's a new one. We've really never seen that before.
Speaker 1: It's really an important one to discussed because where does
Speaker 1: the sleeve investors and what should you think about going forward?
Speaker 1: And then the other one is b x X, which
Speaker 1: is a fixed et N, which is Barclay's halted creations
Speaker 1: on that which it's still trades, but without creations, arbitrage
Speaker 1: is basically destroyed. And so the price d v H
Speaker 1: and the n A V and that causes problems and
Speaker 1: that we've seen before. That's sort of a classic. I'm
Speaker 1: a big bank, I don't feel like offering this anymore.
Speaker 1: Let me just all creations and that's annoying. I think.
Speaker 1: I think there are two different situations, but they both
Speaker 1: speak to this idea of when the E t F
Speaker 1: stops uh doing what it does and I wouldn't say
Speaker 1: broken is the right word, but becomes impaired. Uh you know,
Speaker 1: how does that work? What happens? Joining us will be
Speaker 1: Key d Grindfield of Bloomberg News. She's also the co
Speaker 1: host of the newly launched relaunched E t F i
Speaker 1: Q Show as well as David Nodded with E t
Speaker 1: F Trends, this time on trillions. When E t F
Speaker 1: s stop working, Katie Dave Welcome back to the program.
Speaker 1: Thanks for having me, Thanks for having me too. I
Speaker 1: feel bad, Eric that you had to change things around
Speaker 1: to accommodate me because I don't have a lot of answers. Listen,
Speaker 1: you're very busy, and you look I am happy to
Speaker 1: accommodate you. You just don't look comfortable. Well I'm not.
Speaker 1: I'm I'm sitting Indian style on marble and I'm about
Speaker 1: four feet from a dunkin Donuts kitchen. So but this
Speaker 1: is natural habitat for Eric. He kind of is back
Speaker 1: in the day. Maybe you're gonna have to stretch your
Speaker 1: hip flexors after. Can I just say one quick thing
Speaker 1: about dunkin Donuts pretty pandemic. I would get the same
Speaker 1: breakfast here and then two years pasted because the pandemic,
Speaker 1: and then, as you mentioned, e t F I two started.
Speaker 1: I came back here on Monday two years later, got
Speaker 1: the same thing and it was actually a hair cheaper.
Speaker 1: Although somebody asked me to weigh the food. I was like,
Speaker 1: come on, I don't think. I don't think they're doing that,
Speaker 1: but I think don't donut. That's why the popular I
Speaker 1: think they are able to be more efficient. But anyway,
Speaker 1: interesting tidbits there. I could say many things, and we're
Speaker 1: just gonna ignore that and move on. Um Katie, can
Speaker 1: we start with you what has been happening, because you've
Speaker 1: basically been on the front lines of the past few
Speaker 1: weeks as as all of these things have transpired, it's
Speaker 1: been pretty wild. I mean, it's been a roller coaster
Speaker 1: a few weeks, and I feel like a lot of
Speaker 1: the action has been centered on a bunch of e
Speaker 1: t f s that aren't trading anymore. All of these
Speaker 1: um US listed Russian focused e t f s. Obviously,
Speaker 1: the Van Neck Russia et F was sort of where
Speaker 1: all of this action was concentrated. But I mean, as
Speaker 1: Eric alluded to, none, none of these et fs virtually,
Speaker 1: I think that's correct, are trading anymore. But before that happened,
Speaker 1: I mean, you saw a lot of flows into these funds.
Speaker 1: It's unclear whether that was a create to lens situation,
Speaker 1: people trying to short it. You also saw options volume
Speaker 1: take off on a lot of these funds, including a
Speaker 1: fund I think it was a direction fund that announced
Speaker 1: that it would liquidate and it was a leverage fund.
Speaker 1: And you saw again options contracts just explode in volume,
Speaker 1: which we now know, and I'm sure we'll get into
Speaker 1: it's unclear whether those holders will actually be paid out. Okay, Eric,
Speaker 1: One of the e t F s that we want
Speaker 1: to focus on is called r s X, which is
Speaker 1: the van X Russia e t F. What happened with
Speaker 1: that one? Yeah, essentially actually RSX and all of the
Speaker 1: politic creations, that's not that abnormal. Back ten years ago
Speaker 1: the Egypt et F pltic creations, when the stock exchange
Speaker 1: was closed for like two months, we've seen the before.
Speaker 1: We figured, oh, they'll just trade through. But the difference
Speaker 1: here is this is serious government stuff sanctions. Also, the
Speaker 1: stocks stopped trading, the g d rs on those stocks
Speaker 1: stopped trading, and it became a much more like the
Speaker 1: e t F was thrust into a geopolitical situation, which
Speaker 1: it wasn't in the Egypt case. And so I'll actually
Speaker 1: turn over to Dave because what was different this case
Speaker 1: is the exchanges nicely and cbo E said we're not
Speaker 1: actually gonna get trade it either, and that was new.
Speaker 1: I've never seen that. Normally e t s trade through anything,
Speaker 1: even if the underlying is frozen, and nobody writes about
Speaker 1: mechanics and busted mechanics better than Dave, So I would
Speaker 1: like to get his take on just what he saw
Speaker 1: and what he thinks, uh, sort of happened behind the scenes. Well, well,
Speaker 1: Joel was sort of saying before we got started that
Speaker 1: you only have me on when the car crash happens.
Speaker 1: So it does feel a little bit like that. I mean,
Speaker 1: you're right that this time was very different, and really
Speaker 1: it comes down to the sanctions. I think if you
Speaker 1: want to trace it all the way back, it's not
Speaker 1: so much that the moss Go Exchange closed for business,
Speaker 1: because that's as you pointed out, that happened in Greece,
Speaker 1: that happened in Egypt. But in both those cases there
Speaker 1: was a really legitimate expectation that those markets would reopen,
Speaker 1: they might price differently, right, that the Arab spring could
Speaker 1: have gone a couple of different ways. But I don't
Speaker 1: think anybody was expecting that somehow, you know, all of
Speaker 1: the companies listed, we're going to disappear. What happened with
Speaker 1: the sanctions kind of created this, I think, this cascading problem,
Speaker 1: which is once it became impossible for the Russian companies
Speaker 1: to actually do business as securities anymore, meaning that they
Speaker 1: could pay dividends, that they could pay their their bond servicing,
Speaker 1: all of that stuff. When that became a problem, it
Speaker 1: was really just a ticking time bomb for when the
Speaker 1: LS the London Stock Exchange would effectively have to suspend
Speaker 1: the g d rs and the vast majority of Russian
Speaker 1: stocks that people trade trade in London as g drs,
Speaker 1: not in New York as a d r s, and
Speaker 1: not in Moscow directly. So once that happened, which was
Speaker 1: almost instantaneous, that in the early round of sanctions, that
Speaker 1: it was going to be impossible for these companies to
Speaker 1: actually do business as global public securities. UM. I actually
Speaker 1: think they've waited about a day late. I predicted on Wednesday,
Speaker 1: two weeks ago that they would actually um either delist
Speaker 1: or suspend the g d r s. They haven't actually
Speaker 1: delisted them yet. I think that will be the next
Speaker 1: you to drop, at which point those no longer become
Speaker 1: investible securities, regardless of whether the market reopens if they
Speaker 1: get delisted off the LC. So with no underlying security
Speaker 1: that anybody had faith in anymore, you know, pausing for
Speaker 1: halting creations and that you basically had to do that
Speaker 1: because there was no way to roll up a basket
Speaker 1: of securities anymore to do a creation and then the
Speaker 1: suspension of trading. That really comes down to the obligation
Speaker 1: of the exchanges themselves to ensure that they can make
Speaker 1: orderly markets. Right, That's that's there on the hook for
Speaker 1: that if they let something trade knowing that it's going
Speaker 1: to be you know, hitting the limit up, limit down
Speaker 1: every eight seconds all day long because nobody has any
Speaker 1: idea how to deal with pricing that is on exchange
Speaker 1: a little bit, so you know, we didn't get it
Speaker 1: completely synchronized. I think RSX closed for trading a day
Speaker 1: after E r U S. But but fundamentally you end
Speaker 1: up in the same position, which is you have uninvestable markets.
Speaker 1: That's what's different this time, Dave. And the pantheon of problems,
Speaker 1: which is sort of how I think about you. You're
Speaker 1: you're gonna be the red phone on the desk now
Speaker 1: for trillions and the pantheon of problems. Where do you
Speaker 1: rank this in terms of et F history? Oh predates right,
Speaker 1: So the last time we can point to anything like
Speaker 1: this um is either Cuba or ran both before you know,
Speaker 1: both in the seventies and eight in the sixties prior
Speaker 1: to that, um, which was the last time we actually
Speaker 1: had the opportunity to look at the market and say,
Speaker 1: this just might not exist when we get out the
Speaker 1: other side of this crisis. UM. Now, I actually don't
Speaker 1: think we end up in a world where they actually
Speaker 1: just obviate all foreign ownership in Russia. But that's on
Speaker 1: the table. They're already talking about taking over local assets
Speaker 1: of foreign companies that have pulled out. I think it's
Speaker 1: really just a matter of time before they say and
Speaker 1: we're also obviating for ownership of the of the companies themselves,
Speaker 1: at which point, literally those stocks go to zero, right,
Speaker 1: those properties get written to nothing, which is incidentally what
Speaker 1: happened in Iran, and it is what happened in Cuba,
Speaker 1: which were the only two times in history I guess
Speaker 1: nineteen seventeen and Russia again. Uh, those the only times
Speaker 1: in history that I know that this has happened. So
Speaker 1: it pre dates the et F structure. So if I'm
Speaker 1: a shareholder and I'm looking at that, this seems really bad. Yeah. Yeah,
Speaker 1: if you're sitting here with RSX in your SWAB account
Speaker 1: right now, Uh, the very very high likelihood is that
Speaker 1: you're going to get some very small percentage of your
Speaker 1: money back when RSX finally closes, when they finally liquidated
Speaker 1: it um, and you know it does have some cash.
Speaker 1: They did what they could to raise what money they
Speaker 1: could while those markets were still trading. But at the
Speaker 1: end of the day, the price you see, you know,
Speaker 1: the price you last saw, is pretty close to what
Speaker 1: you might get, probably even less. Uh. And you know,
Speaker 1: as we as you guys mentioned in the beginning, I
Speaker 1: actually can't even predict what they're going to do with
Speaker 1: the options market, because that's crazy, because the options market
Speaker 1: now has no way to settle. You mentioned a word,
Speaker 1: their liquid It's a big scary word, and I was
Speaker 1: going to ask, I mean, how does this end, these
Speaker 1: these e t f s where where trading has been halted,
Speaker 1: Can that be unhalted or do you see this ending
Speaker 1: eventually in liquidation. I only think that you'll see the
Speaker 1: Russian e t f s resume normal trading when you
Speaker 1: see the underlying markets resume normal trading. And I'm very,
Speaker 1: very skeptical that that's going to happen for US investors.
Speaker 1: For for a forty act fund um. I actually think
Speaker 1: it is more likely at this point that those markets
Speaker 1: become truly uninvestable, and that even should Moscow reopen, the
Speaker 1: London will have to delist all those securities on the
Speaker 1: GDR market and nobody's gonna want to own the underlying s.
Speaker 1: E R U S had a lot of the direct underlyings.
Speaker 1: They moved in the last couple of days to put
Speaker 1: more of the A d r s and g d
Speaker 1: rs on the books. But even if that reopens, at
Speaker 1: this point, it won't have I don't think we'll have
Speaker 1: those securities on the books any more. I think it'll
Speaker 1: be mostly cash. So let's say I hold r s X.
Speaker 1: A lot of people actually bought it after all this happened.
Speaker 1: Let's say they're training at three or four dollars. They
Speaker 1: bought it at five six whatever it was low. It
Speaker 1: was four months ago, so it's they're looking, Hey, it's
Speaker 1: a bargain you own that. E t F. Wouldn't you
Speaker 1: rather just have everybody sitting limbo until something gets resolved,
Speaker 1: even if that's two or three years, rather than really
Speaker 1: get nothing. Yeah, I don't think you'll see them just
Speaker 1: decide like next Thursday, to roll up the fund. I
Speaker 1: do think you'll you'll see both. I mean, really, we're
Speaker 1: just talking about black Rock and Van Neck here. I
Speaker 1: think you'll see them. Wait until there's a shoe going
Speaker 1: to drop right, whether either we you know, pass a
Speaker 1: piece of legislation that makes this permanent in terms of
Speaker 1: the sanctions, or Moscow does something to sort of obviate ownership,
Speaker 1: or the l s D lists all the g d
Speaker 1: r s, one of those kinds of events I think
Speaker 1: has to happen first. You're right right now, Today is
Speaker 1: not a day to close down this fund and hand
Speaker 1: everybody back a buck on their dollar, you know, you know,
Speaker 1: a buck on their fifty dollar investment or whatever's left over. Um,
Speaker 1: why why would you do that? So one thing I
Speaker 1: think is you need to be a little cautious of though,
Speaker 1: is I think the idea that these are somehow cheap
Speaker 1: lottery tickets is really dumb. Like I don't think that
Speaker 1: you can look at the price of gas Prom when
Speaker 1: it reopens as some universal lottery ticket, because all assets
Speaker 1: must eventually be worth something. I think we're seeing a
Speaker 1: big shift in the fundamental economic order that's going on.
Speaker 1: So I think that's a that's a bad call. Russia
Speaker 1: is not the land of meme stock, No, I don't
Speaker 1: think so. So on the lottery tickets ideas, I remember
Speaker 1: reporting on the fact that you saw that huge explosion
Speaker 1: both input and call volume, and it was described to
Speaker 1: me as just that cheap lottery tickets. And I mean,
Speaker 1: assuming that e t f s hadn't stopped working, I mean,
Speaker 1: especially for those put contracts, I mean it seems like
Speaker 1: they would have paid off though that actually that wouldn't
Speaker 1: have been such a bad lottery ticket. Oh and I mean, Eric,
Speaker 1: you wrote about this the other day, right, I mean,
Speaker 1: there's actually a fairly substantial put heavy position that's due
Speaker 1: to settle what tomorrow I think on Thursday. I think
Speaker 1: that's right, nineties six million dollars or something like that,
Speaker 1: most of it on the put side that that should
Speaker 1: be in the money, Like to your point, that should
Speaker 1: be a lot of that should be in the money.
Speaker 1: But because the o c C changed how they're doing
Speaker 1: the settlement where it's now I think has to be directed,
Speaker 1: meaning you have to go in and say yes, I'm
Speaker 1: willing to do I think a cash settlement on this um.
Speaker 1: I think there are a lot of folks that are
Speaker 1: gonna let these expire with the opportunity to have gotten
Speaker 1: money out of them, and and that's gonna that's problematic.
Speaker 1: That's not on like van AK, that's kind of on
Speaker 1: the O C C or CBO maybe, but like even there,
Speaker 1: we are in pretty untested territory. So I think it's
Speaker 1: tough to point fingers. By the way, Dave, you mentioned
Speaker 1: the Barclay's of UH fund. That's v xx and e
Speaker 1: t N. What's different about that circumstance than the rs
Speaker 1: X one. Yeah, so totally different way that E T
Speaker 1: s UM sort of broke down a little bit over
Speaker 1: the last couple of weeks, so um vxx for very
Speaker 1: different reasons. Vxx is an exchange trade note i E.
Speaker 1: It's a piece of bank debt issued by Barkley's Bank,
Speaker 1: tracking first and second month volatility futures. It's the most
Speaker 1: popular e T F where E T P I should
Speaker 1: say tracking volatility. It's sort of the traders darling sitting
Speaker 1: on about a billion dollars um and they suspended creations
Speaker 1: on it, which we've seen over and over again from
Speaker 1: E t N issue wers over the last decade um
Speaker 1: to the point where you know, I know you guys,
Speaker 1: now give it a you know, a red a red
Speaker 1: traffic light in every situation. Um. And this is one
Speaker 1: of the big reasons, because it is a little bit
Speaker 1: of you know, a fit of peak that the bank
Speaker 1: can just decide they have too much risk on the
Speaker 1: books and decide to stop issuing new shares, which causes
Speaker 1: premium spikes, which is exactly what we've seen in v
Speaker 1: x X. It's exactly what Credit Suite did to t
Speaker 1: VX uh basically a decade ago. Uh. And in that case,
Speaker 1: they just led a trade to a premium until they
Speaker 1: got comfortable again, and then they issued a whole bunch
Speaker 1: of shares out of inventory and in my opinion, somewhat
Speaker 1: feloniously probably booked the profit on that because they were
Speaker 1: actually issuing out of the market at a high price. UM.
Speaker 1: Let me jump in here, because uh, these banks, Uh,
Speaker 1: you're right, they do it almost when they want, and
Speaker 1: that's what's annoying. In this case. Barclays did give some
Speaker 1: logic they said, well, we've run out of issuance capacity,
Speaker 1: but if you look at the documents, they are not
Speaker 1: out of issuance capacity. They have plenty of runway left.
Speaker 1: And so some speculated it's about hedging costs some who
Speaker 1: speculated that somebody made a clerical error with the structure
Speaker 1: products and this is sort of part of that fallout.
Speaker 1: There's also a theory that it could be the canary
Speaker 1: and a deeper problem with their books. Uh, and somebody
Speaker 1: that management is just like, stop everything, what's your take on,
Speaker 1: what's really going on behind the scenes? Who pulled the
Speaker 1: plug and why? Well, so there are rumors on I
Speaker 1: mean I heard those rumors too, that there was sort
Speaker 1: of a blow up in some structure product issuance that
Speaker 1: had to get delayed. Um, and that puts some strain
Speaker 1: on the risk desk. And remember in the in the
Speaker 1: sort of a post Dodd Frank world, banks have to
Speaker 1: actually manage their overall risk pretty carefully. And so every
Speaker 1: bank has somebody whose job it is to pay attention
Speaker 1: to how much VEGA exposure do we have, right, how
Speaker 1: much long equity exposure do we have, how much international
Speaker 1: currency exposure do we have? And in most cases they're
Speaker 1: monitoring that literally in real time to make sure that
Speaker 1: the bank doesn't get over at skis SKIS because they're
Speaker 1: considered you know, important institutions by regulators around the world. Um,
Speaker 1: so it is not unlikely that somebody looked at their
Speaker 1: book and said, we have way too much long ball
Speaker 1: exposure on our book for the given volatility environment. Even
Speaker 1: though all of the E t N value of that
Speaker 1: was offset by an exactly equal liability in the E
Speaker 1: t N, that doesn't matter. That doesn't get to be
Speaker 1: counted because that's just considered short term paper on the book.
Speaker 1: So there's a lot there's an asset liability miss match
Speaker 1: in terms of how banks have to account for these things.
Speaker 1: So it's not inconceivable they just got over their skis
Speaker 1: on risk. The sort of canard they put up of
Speaker 1: well we ran out of share issuance, that does happen
Speaker 1: like I mean, we know for a fact, for instance,
Speaker 1: that US Commodities Funds ran into this on U s
Speaker 1: O and I think on U n G a few
Speaker 1: times where they literally just didn't file to issue new
Speaker 1: new shares. Unlike an e t F, a commodity spooler
Speaker 1: in E t N can only sell the shares it's
Speaker 1: it's actually registered with the exchange, and when they run
Speaker 1: out of those, they have to file for more and
Speaker 1: pay a decent amount of money. So every time they
Speaker 1: file for one of these extensions. It's like a hundred
Speaker 1: and fifty grand to put a bunch of new shares
Speaker 1: up on the books. Now, it's possible for them to
Speaker 1: reuse shares that have been redeemed, but most banks don't,
Speaker 1: and I don't believe either Credits Weeks or Barkleys does.
Speaker 1: So when we look at and say, oh, well, there's
Speaker 1: thirty three e t N three million e tns outstanding
Speaker 1: and they've got coverage for fifty the problem is if
Speaker 1: there has been a hundred million dollars in creations and
Speaker 1: a hundred million dollars and redemptions, they don't get to
Speaker 1: count that again, so they actually sort of use up
Speaker 1: only one side of the balance sheet when they're issuing.
Speaker 1: We don't actually know. You can't really impute it because
Speaker 1: the creation redemption numbers are net so we don't get
Speaker 1: to really see the creation redemption. We get to see
Speaker 1: the net um. But I suspect either they let that
Speaker 1: happen on purpose to get out of this business, or
Speaker 1: the risk desk turned them down. Something that caught my
Speaker 1: eye with this v x X situation is just the
Speaker 1: ripple effects that it could have for the volatility market,
Speaker 1: largely because I don't know. You might look at the
Speaker 1: size of v x x and say, okay, it's like
Speaker 1: nine million dollars. That's big, but it's not systemically big.
Speaker 1: But Goldman actually put out a note yesterday noting that
Speaker 1: if you look at the options market that surrounds v
Speaker 1: x x, uh the share a count of options is
Speaker 1: about or rather, the outstanding options on v xx are
Speaker 1: roughly six times v x x is actual share account.
Speaker 1: That is more than double the ratio of all but
Speaker 1: two e t f s, which is pretty amazing. Mean,
Speaker 1: it just speaks to that a lot of these volatility
Speaker 1: e t F c t N s, they're used as
Speaker 1: trading tools for a lot of these volatility players. And
Speaker 1: I mean what this means for the liquidity. I mean,
Speaker 1: how could that options market around vxx be liquid if
Speaker 1: this e t N isn't really trading or wears are halted,
Speaker 1: it's still trading, right right, So so the share creation
Speaker 1: just means that it's going to disconnect from its fair
Speaker 1: value and it's mostly going to trade at a premium.
Speaker 1: But to your point, you're right, like, the options complex
Speaker 1: around v xx is huge, and a lot of big
Speaker 1: hedge funds use that on a very dynamic basis what
Speaker 1: you're what, what you're seeing, if you're to monitor fin
Speaker 1: twit vol folks, the trader community there you're talking, you're
Speaker 1: seeing a lot of talking about moving to other vehicles,
Speaker 1: moving to other ways of expressing those opinions about VEGA.
Speaker 1: But that that options expiration cycle, both in the VXX
Speaker 1: and really in the spy options and and the and
Speaker 1: the in the futures, like that really impacts volatility in
Speaker 1: pricing right the voulu you know, the whole sort of
Speaker 1: vallpenning around opex is a very real phenomenon. It's less
Speaker 1: of an issue in the VIXED complex than it is
Speaker 1: directly in the underlying indexes. But you're right, like this
Speaker 1: is it's a lot of shifting around of where that
Speaker 1: exposure is going to come from. In that shifting around
Speaker 1: create the opportunities for hiccups. Um. One of the aspects
Speaker 1: of this is people who short the x X. So
Speaker 1: last we look, there was about fifty of the shares
Speaker 1: were held short the all creations, and man, you've gotta
Speaker 1: be they screwed them over because let's say your short
Speaker 1: this all of a sudden, it starts creeping up because
Speaker 1: other people who are short start covering, well they have
Speaker 1: they can't do creations. They gotta buy vxx open market.
Speaker 1: That really starts to lift the price quickly, and then
Speaker 1: you panic you can start to cover. So all of
Speaker 1: a sudden, you're basically it's it's a you're in a
Speaker 1: race to just basically make sure you don't lose too much.
Speaker 1: Could they like sue the company because that's that's really
Speaker 1: the product not working as designed. Uh, not that anybody
Speaker 1: has these sympathy for short sellers, but they really they
Speaker 1: made a fair bet and they got they're getting screwed
Speaker 1: over interest. It was at six according to market numbers.
Speaker 1: That's you basically just described the two fift t VIX
Speaker 1: lawsuit right, which when you know what they got sued
Speaker 1: for there, which was you know, we didn't you know,
Speaker 1: manage the product correctly and therefore reliable to cred suits
Speaker 1: won that lawsuit. So so, whether they morally should have
Speaker 1: or not, they won the lawsuit because they had appropriately
Speaker 1: disclosed everything they needed to disclose. I guarantee you that
Speaker 1: Barclays is pretty much in the same boat. Everybody learned
Speaker 1: that lesson that this is a get out of jail
Speaker 1: free card. Um which is again why you guys put
Speaker 1: a red light on this thing, right, because this is
Speaker 1: always an option to your point about like all those
Speaker 1: people who were short, and whether they're screwed or not.
Speaker 1: You know, I guess the one thing against that would
Speaker 1: be that there are other products out there, right, so
Speaker 1: you know their BIXI exists, right, There is comparable beta
Speaker 1: exposure available. It's not that difficult to roll up sort
Speaker 1: of at the hedge fund level, and exposure that looks
Speaker 1: just like vxx. So if you're short, you know at
Speaker 1: premium you can actually cover your beta on that completely
Speaker 1: just by buying vixie or by putting together your own
Speaker 1: rolling portfolio of those things. So I don't think that
Speaker 1: there's a systemic issue with that short position being there,
Speaker 1: but there's no question if you're sitting there on the
Speaker 1: short side, you have a really tough decision to make.
Speaker 1: Do you cover up and make it worse or do
Speaker 1: you just hang on for dear life, noting that eventually
Speaker 1: this thing will crash back down to earth. What would
Speaker 1: you do? I get the heck out of it, like,
Speaker 1: I mean, it's I mean, I got a lot of
Speaker 1: questions from people like, oh, how do I play this
Speaker 1: premium blah blah blah blah blah, and it's like there
Speaker 1: are billions of dollars in very sophisticated hedge funds waiting
Speaker 1: for you to try, just desperate for you to try
Speaker 1: to play this, Mr individual investor. By the way, sometimes
Speaker 1: I tweet about this and most people have the sort
Speaker 1: of understandable reaction, like call what it means, but really
Speaker 1: I don't know. Tenth reply is like, oh, I'm loving this.
Speaker 1: I don't know what they're doing, but they just some
Speaker 1: people just love when Like are they financial journalists because this, Yeah,
Speaker 1: that's true. These would be like people with like thirty
Speaker 1: five followers. I think they're like, they're definitely a day
Speaker 1: trade there. There there is a there. I absolutely have
Speaker 1: seen the tweets from folks that we're using VXX in
Speaker 1: sophisticated vall hedge fund strategies precisely because they knew this
Speaker 1: could happen. Right, This was actually a feature, not a bug,
Speaker 1: because it only goes one way. Right, there's nothing you
Speaker 1: can do to be XX to make it traded at discount.
Speaker 1: Like that's not that's not how the real world works,
Speaker 1: and that would be unprecedented in the e t F world.
Speaker 1: But you know, taking something that's an e t N
Speaker 1: having a pop to a crazy premium, that's free money
Speaker 1: for the folks that were smart enough to realize this
Speaker 1: is just a hanging chad over e t N s
Speaker 1: every day. If you were the SEC or you know
Speaker 1: somebody that control over this, where all the banks you
Speaker 1: could tell them, would you advise or regulate them to
Speaker 1: get out of the E t M business once and
Speaker 1: for all? Or is it okay to have this sort
Speaker 1: of graded our district where this can happen over and over.
Speaker 1: You just live with it because, um, you know, if
Speaker 1: there's a market, hey, let people trade it. What do
Speaker 1: you think it's time to just get them out? Uh?
Speaker 1: What I'd rather see is for them to allow forty
Speaker 1: act structures to effectively create the same types of things
Speaker 1: like a lot of the pro shayers leverage and inverse funds,
Speaker 1: for instance, are just straight up forty act funds because
Speaker 1: they got in under the wire and they let them
Speaker 1: manage them that way. There's no reason you have to
Speaker 1: put this exposure into an e t N. This exposure
Speaker 1: could very easily be in a straight up CFTC regulated
Speaker 1: commodities pool. Um So in this case, I don't see
Speaker 1: any reason for the e t N to exist. Uh.
Speaker 1: And the SEC has been I mean they've paid attention.
Speaker 1: Like I mean, over every couple of years, the SEC
Speaker 1: turns the eye of we're on towards the E t
Speaker 1: N market and waves their finger a little bit, you know,
Speaker 1: And to be fair, we are now down to a handful.
Speaker 1: I mean, you and I remember Eric, you know, ten
Speaker 1: years ago there were dozens and dozens and dozens of
Speaker 1: all those E tracks E t N s that didn't trade,
Speaker 1: and like I mean, it was just it was a
Speaker 1: real littered field of garbage that you know, all had
Speaker 1: two million dollars in it never closed. Most of that's
Speaker 1: finally thankfully gone away. Um. But yeah, at this point,
Speaker 1: I would just think that it's better to shut these
Speaker 1: things down. I'm not sure anybody's really getting great exposure
Speaker 1: out of them anymore. And if you want this kind
Speaker 1: of exposure is a wealthy investor. This is what structure
Speaker 1: products are for. Literally, these kinds of patterns of returns.
Speaker 1: Just one more wonky question. And the reason for using
Speaker 1: E t N over E t F told the same
Speaker 1: thing like fix or oil, is that the E t
Speaker 1: N is taxed in a way that's a little more
Speaker 1: like a stock, whereas the E T S holds futures
Speaker 1: and taxation isn't as ideal, So is it is? The
Speaker 1: E t N popularity really just largely about this tax loophole,
Speaker 1: or I should say tax uh standardization with other ets.
Speaker 1: I think it's two things. So, yes, the fact that
Speaker 1: they're treated as prepaid forward contracts ie they get text
Speaker 1: just like stock. That was a big selling point back
Speaker 1: in the day, particularly around commodities E T N S
Speaker 1: before we actually had a lot of the commodities pool
Speaker 1: ones out there. Um. I think that's largely obviated now
Speaker 1: because we've got great no K one commodity ETF and
Speaker 1: all that kind of stuff. Um. The the other one
Speaker 1: is frankly perfect tracking. Right. So the great thing about
Speaker 1: VXX if you're a vaultrator running a very tight quantitative strategy,
Speaker 1: is that you know what the indicative value is to
Speaker 1: the penny and it never varies. Right, It's mathematically guaranteed.
Speaker 1: When there was a viable creation redemption mechanism and it
Speaker 1: was trading spot on, I have all the time. That's valuable.
Speaker 1: And this is a complex strategy with a daily roll.
Speaker 1: So there's a lot of opportunity for friction and miss
Speaker 1: on this. So having it in a perfect tracking vehicle
Speaker 1: like an et N makes a lot of sense. Dave.
Speaker 1: One of the things that I just wanted to ask
Speaker 1: you here was interesting what you said about E t
Speaker 1: N S anything else that this episode has revealed that
Speaker 1: the market needs to be talking about more openly and
Speaker 1: consider changes or is this kind of business as usual
Speaker 1: in worst case scenarios. It feels pretty business as usial
Speaker 1: in worst case scenarios. I mean, we'd really do need
Speaker 1: to make clear that this was a conversation in two chapters.
Speaker 1: What's going on in v x x UH and the
Speaker 1: other barklays et N that's shut, which is O I
Speaker 1: l um. That is an extraordinarily unique thing to e
Speaker 1: t N s issued by the two big banks that
Speaker 1: really still issue e t N s um and it
Speaker 1: is the most problematic edge of the EXTREMEE traded product landscape.
Speaker 1: That has nothing to do with what's going on in Russia,
Speaker 1: even though we are talking about suspended you know, creations
Speaker 1: in both cases, what's going on in Russia strikes me
Speaker 1: as a little bit more like a two year flood.
Speaker 1: I I would not have expected to see this in
Speaker 1: my lifetime, and I don't particularly expect to see it
Speaker 1: again in my lifetime because it requires, you know, literally
Speaker 1: the overnight turning of a major economic player into a
Speaker 1: pariahs state. I don't think we're going to see that
Speaker 1: again in the next twenty years. I hope. Right. Well,
Speaker 1: you've bring up the emergency markets, so we didn't really
Speaker 1: get to that. But like you know, this is why
Speaker 1: the cold emerging I mean, they are dangerous. The governments,
Speaker 1: some of them authoritarian. I will say this is probably
Speaker 1: you know, we've had first toll on her F R,
Speaker 1: D M, E TF talk about in et F. It
Speaker 1: keeps getting justified and justified. No China, no Turkey. It
Speaker 1: really is true. All the problems are from governments with authority,
Speaker 1: authoritarian sort of you know, not dictators, but just governments
Speaker 1: can just do whatever they want. Um, it's an interesting
Speaker 1: time for that fund. I think it would probably grow
Speaker 1: after this. But I do think the emerging markets, especially
Speaker 1: with China, it's gonna get it now. China is going
Speaker 1: to be even bigger in e M, and I don't know,
Speaker 1: I can feel like the whole emerging markets complex or
Speaker 1: it gets unbundled or shifted around. I don't know this.
Speaker 1: Do you think this is a game changing moment. I
Speaker 1: think I've already said they're they're killing the acronym brick
Speaker 1: at some point. Yeah. I I'm not a big fan
Speaker 1: of the idea of bricks or bicks anyway, but but yeah,
Speaker 1: I think this puts a spotlight on what we mean
Speaker 1: by emerging markets. I think a lot of people, particularly
Speaker 1: financial advisors, have treated e m as as a monolithic bucket. Right.
Speaker 1: It's just a pattern of returns you put in the
Speaker 1: corner of your portfolio. You put eight percent in it,
Speaker 1: and everybody's happy. Um. And what we're learning is, though
Speaker 1: there's a huge difference between Russia, China, India, Brazil and
Speaker 1: all of the other emerging markets, they're all individually very unique. UM.
Speaker 1: I'm a big fan of Perth product f R d M.
Speaker 1: I think it's a really great way to to to
Speaker 1: spin this UM. But I think what we also saw
Speaker 1: was when we all the major emerging markets ets had
Speaker 1: to pull Russia out because the index providers called those
Speaker 1: market Russia uninvestable. Again, there was a lot of I
Speaker 1: think legitimate hand ringing there that the optionality of whether
Speaker 1: or not those Russian stocks might someday be worth something
Speaker 1: was being taking out of the hands of an existing
Speaker 1: e e M or vw OH shareholder. That's a legit complaint,
Speaker 1: but it's a complaint about indexing and that and I
Speaker 1: think that's a really important thing if you're in an
Speaker 1: actively managed emerging markets mutual fund right now, they must exist.
Speaker 1: I can't think I went off the top of my head.
Speaker 1: Whether or not you were in Russia is a choice
Speaker 1: that your PM made, right so that like you voted
Speaker 1: for that PM with your dollars. I don't think most
Speaker 1: people who just threw money into EM or v w
Speaker 1: OH spent a lot of energy thinking about whether they
Speaker 1: were enough foot see or MSc I index and what
Speaker 1: was going to happen on you know, whether this country
Speaker 1: was going to get in or out. You know, we
Speaker 1: talked about it when countries, you know, try to get
Speaker 1: into the emerging markets, but like this is a big
Speaker 1: getting out and that's been you know, a long time coming.
Speaker 1: We haven't seen that before, all right, Dave. Usually I
Speaker 1: asked for favorite tickers. We've done that before with you. Um,
Speaker 1: I want to ask you what's your favorite E M ticker. Well,
Speaker 1: I mean I already said it Freedom f r d
Speaker 1: M Alpha architect Freedom one hundred. I get that right.
Speaker 1: I don't even remember if I got the name of
Speaker 1: the fund right, but it's that far d M and
Speaker 1: it's the only, it's really the only interesting emerging markets
Speaker 1: fund out there. It's the only one doing something really different. Dave, Katie,
Speaker 1: thanks for joining us on Trillians. Thank you, thank you.
Speaker 1: Thanks for listening to Trillions. Until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify,
Speaker 1: and wherever else woul you'd like to listen. We'd love
Speaker 1: to hear from you. We're on Twitter, I'm at Joel
Speaker 1: Webber Show. He's at aer Fultunice. This episode of Trilliance
Speaker 1: was produced by Magnus Hendrickson. Francesca Levi is the head
Speaker 1: of Bloomberg podcast Fight