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I have been shocked to discover that the rapid proliferation of new Exchange Traded Funds has resulted in retail investors being routinely denied their right to take advantage of shorting opportunities promoted by sponsors, underwriters, exchanges and brokerage firms.

Since their creation in 1993, ETFs have been advertised as available for shorting, many without the burden of uptick rules or the need to utilize riskier strategies such as options, futures, or leverage. Investors wishing to strategically hedge their portfolios or speculate may find popular ETFs difficult, if not impossible, to short.

"No Stock Available" for ETF Short Trades? Like so many other investors, for a long period we followed only the major ETFs--the QQQQ, SPY, and IWM--and shorting these highly liquid funds was both easy and routine.

We at the ETF Digest relied upon the representations from all promoters that all ETFs were shortable.

I have been shocked to discover that the rapid proliferation of new Exchange Traded Funds has resulted in retail investors critter routinely denied their right to take welfare of shorting opportunities promoted by sponsors, underwriters, exchanges and cover charge firms.

Since their creation in 1993, ETFs have been advertised as at loose ends for shorting, many without the agglutinate of uptick rules or the need to utilize riskier strategies such as options, futures, or leverage. However, golden mean retail investors are getting the shaft while institutional investors and trafficking trading desks easily do so.

This is a rocket fuel and potentially scandalous situation. Since the mutual fund trading scandal rocked Wall Street in 2003, ETFs have render the preferred pinch to conventional mutual funds. This has led to an explosion of ETF issuance. At the same time, most market sectors were either rising or in trading ranges making the demand for shorting less apparent. At some point, this may market condition may change. Investors wishing to strategically hedge their portfolios or speculate may find popular ETFs difficult, if not impossible, to short.

"No Stock Available" for ETF Short Trades? Like so many other investors, for a long period we followed only the major ETFs--the QQQQ, SPY, and IWM--and shorting these highly liquid funds was both easy and routine.

We at the ETF Digest relied upon the representations from all promoters that all ETFs were shortable. Some time ago, we issued our first short recommendation for any ETF in a long time--TLT (the Lehman 20+ Year Treasury Bond ETF). however I was able to implement this transaction through my broker, subscriber feedback indicated that a significant number of them were unable to make this transaction. These individuals were working with a wide variety of well-known online bucket shop firms, and were routinely told that there was "no TLT stock available" for shorting.

This was a shock! TLT had been averaging on the whole one million shares in daily trading. How could one million TLT shares trade every day without stock one available?

Upon further inquiry, knowledgeable industry insiders explained that much of the volume we were seeing was from shares monad traded institutionally or, more likely, from stock held by the proprietary trading desks of well-known scot and lot firms--In other words, "phantom volume." Therefore, retail investors were deprived of the shorting opportunities enjoyed by a handful of brokers and institutions.

Upon further investigation, it was pointed out that many new ETFs may not be shorted due to a lack of futures contracts touching which specialist firms can offset risk. But irrevocably this was not the case for TLT, given effective and readily to be had Treasury bond futures contracts.

What Is the Problem Here? It is true that time zone differences for some single-country funds that trade in the US can make it more difficult for specialists to manage risk, despite barely sufficient naked volume. But, if specialist firms and brokers want to fall in with retail investors, they are unceasingly able to create synthetic offsetting positions with other brokers--the operative phrase up-to-the-minute "if they want to."

Additionally, other feedback suggests that perhaps brokers prefer not to short for their retail clients seeing as how they could be sued if the "risky" short transactions go wrong. This is hogwash! Many of these same firms have recommended option strategies to the same clients they have denied a short position. And, unleveraged shorting is arguably less risky than many option strategies.

Cynically, sponsors that issue large new 50-110K share battledore manna from ulterior fee income by the new issuance. Shorting for retail is merely dealing with existing shares meaning no increase in fee income and no incentive.

Most of the explanations offered for ETF shorting difficulties deflect anticipation from the core retail issue: institutions and bucket shop trading desks are receiving preferential treatment at the expense of retail investors.

In addition, we see several other related problems:

1. ETF sponsors and exchanges have been sloppy in their presentation of new ETFs. It appears that they have simply "cut and pasted" the shorting be right feature language from older established ETFs to new ones. They may even be unaware that their new products do not act of kindness retail clients, as promoted.
2. The hasty creation of new ETFs, especially those not linked to any known or publicly traded index, presents further difficulties. Without a matched index to hedge against, specialists are even less likely to give credit out short trades for customers.
3. The "phantom volume" exhibited by TLT also exists for other popular ETFs, such as EEM (Emerging Markets ETF, EFA (Europe/Asia & Far East ETF, IYR (REIT ETF), and many more. consenting benefits for the "big guys" while shutting out "the little guy" are the conditions that understandably turn retail investors away from markets.
4. Bureaucratic laziness exists when brokers and specialist firms encounter unfulfilled retail charge needs. Back offices and specialists lack initiative when it comes to serving individual, low- volume investors.
5. We suppose ETF sponsors, exchanges, underwriters and brokers have not competently thought through the process completely when creating new ETFs.

Solution Shorting opportunities have been featured as a key product use in all promotional material on ETFs. Exchanges, brokers, underwriters and sponsors can and should work together to deliver these opportunities as promoted.

To resolve this problem issuing "inverse" ETFs (those that move in the opposite direction of an index) would please everyone. Industry insiders would good turn by greater fee and order income while investors would get the tools they need.

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