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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 viscera routinely denied their right to take start of shorting opportunities promoted by sponsors, underwriters, exchanges and fee firms.

Since their creation in 1993, ETFs have been advertised as out of harness for shorting, many without the chest voice of uptick rules or the need to utilize riskier strategies such as options, futures, or leverage. However, besetting retail investors are getting the shaft while institutional investors and interchange trading desks easily do so.

This is a hotheaded and potentially scandalous situation. Since the mutual fund trading scandal rocked Wall Street in 2003, ETFs have grow the preferred volitional 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). at any rate 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 license fee firms, and were routinely told that there was "no TLT stock available" for shorting.

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

Upon further inquiry, knowledgeable industry insiders explained that much of the volume we were seeing was from shares extant traded institutionally or, more likely, from stock held by the proprietary trading desks of well-known agency 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 towards which specialist firms can offset risk. But obviously this was not the case for TLT, given pretty good and readily all-around 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 goodish exterior volume. But, if specialist firms and brokers want to retail investors, they are at every turn able to create synthetic offsetting positions with other brokers--the operative phrase existing "if they want to."

Additionally, other feedback suggests that perhaps brokers prefer not to short for their retail clients whereas 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 toy right of entry from secondary 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 tender loving care from the core retail issue: institutions and merchandising 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 reclaim feature language from older established ETFs to new ones. They may even be unaware that their new products do not remedy 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 brace 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. indulgent 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 vassal needs. Back offices and specialists lack initiative when it comes to serving individual, low- volume investors.
5. We conclude ETF sponsors, exchanges, underwriters and brokers have not well thought through the process completely when creating new ETFs.

Solution Shorting opportunities have been featured as a key product help 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 proffer aid by greater fee and sitting income while investors would get the tools they need.

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