At 3 p.m., do you get queasy just thinking about the toll that the final hour of trading might take on your portfolio?
New research suggests that on days when the indexes make big moves, leveraged exchange-traded funds could trigger a trading cascade, turning the market close into a buying or selling frenzy.
To be fair, there has been no meltdown — yet. But as the financial crisis has intensified since last fall, the final hour of the trading day has felt rougher than ever.
Leveraged ETFs offer double or even triple the daily return of a market index. Some of them, called “inverse” ETFs, move opposite to the market — for example, going up twice as much as an index goes down. Each day, they all adjust their exposure by rebalancing, or “releveraging,” their positions.
These funds are the hottest thing on Wall Street. In March alone, $3.4 billion of new money poured into ETFs that use leverage to magnify the returns on U.S. stocks.
Further amplifying the ETFs’ actions: Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 p.m. approaches. That enables hedge funds and other big investors to trade ahead of the ETFs.
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