Josh Lukeman, head of ETF and index swap trading at Credit Suisse in the Americas, in a recent New York Times report discounted the theory that leveraged ETFs are boosting market volatility. Lukeman noted that the leveraged funds did not trade enough to have any outsize impact, according to the paper.
“He did note that short-term traders would often buy or sell indexes around 3 p.m., hoping to get in front of the trades that leveraged ETF’s have to make before the close of trading that day,” the NYT reported. “But he said he doubted that that alone could explain the increased volatility in recent weeks.”
Although total ETF trading volume has risen dramatically in recent years, much of the action is concentrated in the largest funds such as SPDR S&P 500 (NYSEArca: SPY). For example, trading the ETF accounted for more than a third of all volume last month, according to a report. [ETF Trading Volume Rises]
ETFs have faced more scrutiny as assets and trading volume in the financial products have ramped higher in recent years. They experienced “busted” or cancelled trades during the flash crash in 2010, but regulators found no evidence they contributed to the event.
The SEC has been examining derivatives for years, and although regulators continue to look at inverse and leveraged ETFs, there are no signs of any sweeping changes forthcoming.
“It’s understandable for the investment community to look for possible explanations in periods of extreme volatility,” Credit Suisse said.
Full disclosure: Tom Lydon’s clients own SPY.