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ETFs are continuing to grow in popularity, which is awesome.
Also means it’s important to understand the basic dynamics:
Will Hershey
251 posts
Will Hershey
@maybebullish
- Replying to @mkobach@TimSweeneyEpic do you view Fortnite as a game, or as a platform?
- While several narratives have developed for the rationale behind the increasing $MSTR premium against its BTC holdings, I think there is a simpler explanation. The first levered single stock ETF referencing MSTR began trading on August 15th. On that date, MSTR closed at a
- Replying to @maybebullish8) As a result, the market maker is no longer long the underlying ABC components (those shares were delivered to ETF trust). Nor are they short shares of ABC (newly created ETF shares have offset their previous short position). This is called the in-kind creation process.
- Replying to @maybebullish and @profplum99Regardless the real story not being discussed IMO is how the funds are using options for a majority of exposure at this point. That’s going to make it awfully difficult to meet their investment objectives. They also are long very deep ITM strikes that will make quarter end RIC
- Replying to @maybebullishOne additional quirk to be aware of. These funds have started to add exposure via options rather than swaps, either due to swap capacity limits or VaR constraints. You can see the specific strikes in the Fund’s daily holdings files.
- Replying to @maybebullish1) You submit an order to buy 100 shares of an ETF, ticker ‘ABC’. If there is a “natural” seller (i.e. an ABC shareholder that is willing to sell), your trade is executed. You buy 100 shares of ABC from the “natural” seller. The trade is complete.
- Replying to @maybebullish3) The market maker may have sold existing inventory from its balance sheet. More likely, however, is that the market maker didn’t own any shares of ABC before the trade. Instead, they borrowed 100 shares of ABC to sell to you. The market maker is now short 100 shares of ABC.
- Replying to @maybebullish7) In order to do so, the AP delivers 50,000 shares worth of the underlying ABC components to the ETF trust, which in turn issues 50,000 “newly created” shares of ABC.
- Replying to @maybebullish6) Once the value of their hedged traded reaches the size of one creation unit (i.e. 50,000 ETF shares worth), the market maker places a trade via an Authorized Participant (“AP”) to “create” new shares of the ABC ETF.
- Replying to @maybebullish4) The market maker doesn’t want to take price risk. As a result, simultaneous to shorting 100 shares of ABC, the market maker buys 100 shares worth of the underlying basket. The market maker is now long 100 shares worth of the underlying ABC basket, and short 100 shares of ABC.
- Replying to @jimcramerGoing out on a limb here but don’t think this is about valuation
- Replying to @maybebullish2) However, there isn’t always a “natural seller.” Instead, you submit an order to buy 100 shares of ABC. In this scenario, a market maker steps in to make you a price. You buy 100 shares of ABC from the market maker.
