An interesting article in WSJ about the impact of Ultra Short ETFs on all the wild swings we have seen recently during the afternoon trading...

The final hour of trading has become significantly more active. In November, an average 26.2% of trading volume in the stocks in the Standard & Poor's 500-stock index took place in the final hour and 17.1% in the last 30 minutes, according to data from Credit Suisse. That's a much higher share than before: In 2006 and 2007, 20.7% occurred in the last hour and 12.9% in the last half hour.

This surge in trading has come amid big moves in prices. In many days, prices have been moving three or four percentage points in the last hour -- moves that not very long ago would have been extreme for an entire day

On the surface the theory the author is promoting seems a little weak as compared to the normal margin call/ hedge fund liquidation theory, but on the other hand it also makes sense.

Michael O'Rourke, market strategist at brokerage BTIG LLC, says ETF trading helps explain why there have been so many days where an up or down move suddenly picked up speed for no apparent reason. Their trading activity "reinforces a trend once it starts in motion," he says. Will Weinstein, chairman of Conifer Securities, believes trading connected to the ETFs is "the primary source of volatility in stocks covered by these levered ETFs by a lot." These funds, he says, "are making an already unstable environment much, much worse

What's more, both the levered short and long ETFs create trading in the same direction. Here's how: Take a bull market ETF designed to deliver twice the returns when stocks move higher. Starting with a base value of $100 per share, a broker who sells the ETF to a client will have an exposure to the market of $200. If the market falls 10%, the value of the ETF falls 20% to $80 and the broker's exposure falls to $180 once the market's move is factored in. To square the books, the broker sells $20 of the underlying stocks at the end of the day. Then consider $100 of a double-leveraged bear market fund, which leaves a dealer with $200 worth of short exposure. If the market falls 10%, the fund rises in value by 20% to $120. The dealer's short exposure is now $180 once the market's move is factored in. As a result, the dealer must sell $60 to get back in line.

To sum it up- Ultra Short ETFs are not only dangerous long term holdings for individual investors due to the compounding and slippage issues (magnifying losses when trend turns the other way due to pure statistical fact of daily double return requirement) but might be also introducing another "black box" into the "already" crowded "Wall Street's "weapons of mass destructions arsenal"...

Stay safe out there and please be careful when using Ultra Shorts as a long term hedge, skepticalcapitalist@gmail.com