UNMASKED ECONOMIST: ETF Reckoning Day?

giovedì 3 settembre 2009

ETF Reckoning Day?

09/02/09 Baltimore, Maryland

Commodity speculators take heed: The popular crude oil exchange-traded note DXO is kicking the bucket — quickly and controversially — and other similar securities might follow suit.

Deutsche Bank announced late yesterday that they were pulling the plug on the PowerShares DB Crude Oil Double Long ETN (better known as DXO). Most ETFs and ETNs die out because they can’t attract enough investors. DXO seems to have suffered the opposite fate.

In the new clampdown on commodity speculators, it’s no huge surprise to see the world’s most popular double-long, leveraged ETN fold suddenly. Deutsche Bank didn’t specifically claim that the Commodity Futures Trading Commission put the kibosh on the DXO, but their press release did cite a “regulatory event” as the principal reason for the closure.

Set to close on Sept. 9, DXO is now hemorrhaging. We’re not sure which is worse for share prices: its imminent closure or that it’s double leveraged a commodity that’s currently plummeting.

Deutsche Bank has other popular commodity trading vehicles, like DBA (agriculture) and DBC (general commodities), that could suffer a similar fate. Both of those funds rely on a position limit exemption, which the CFTC revoked last month. Caveat emptor.

“Anytime the government intervenes like this in the financial markets, they destroy efficiency,” says Resource Trader Alert’s Alan Knuckman. “The action by the CFTC to limit position sizes will only make the problem worse by decreasing liquidity. Markets need more speculators — not less — to lessen the impact by any one entity. For example, the elimination of short selling in the financial stocks in the fall of 2008 caused more damage by dragging out the inevitable for companies that made disastrously poor decisions.

“The CFTC will force trading to move to the over the counter market, which lacks transparency, or to foreign exchanges. Volume and open interest could decline here in the United States and make transacting business more difficult and costly in the future. The present tight bid/ask spreads ensure smooth market entries and exits for all. Without the ability to execute a solid trading plan efficiently, the risks increase for all participants.

“With the current and effective monitoring rules, we know exactly who and how players are positioned. Under the proposed political pandering, that data will disappear from the public eye.”