An exotic group of exchange-traded funds introduced over the past few years are getting fingered by traders for stocks’ wild moves at the close of sessions.
Morning Call: December 15
Many traders are blaming high-octane exchange-traded funds for the market’s wild moves in the last hour of trading.
They’re called “leveraged” ETFs and are designed to magnify bets on broad stock indexes or more narrow sectors of the market, such as financials or real-estate investments.
The leverage aspect, usually achieved through underlying swaps or options, means a holder earns or loses two or three times the returns on the funds. ETFs are typically baskets of securities traded on exchanges, and the leveraged kind are designed either to profit when stocks rise or when they fall.
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.
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