Leveraged ETFs Not Pushing the Indices to Extremes (Often)
There’s been a lot of talk this year about leveraged ETFs pushing the market to make more extreme moves near the close (likely in the same direction as the rest of the day). Click for a WSJ primer on the issue.
Now I don’t know if traders are seeing a surge in volume near the close (because I don’t trade intraday), I don’t know if leveraged ETFs are responsible for today’s higher levels of market volatility, and I don’t know if leveraged ETFs add potential systemic risk should the market make a really big move up or down (a’la Oct. 1987).
But I do know that, leveraged ETFs are not pushing the market to close at intraday extremes with any more frequency than has been observed historically.
A simple test. The graph above shows a 1-year rolling average of the % of days that the SPY closed in either the top or bottom 20% of its intraday range (blue, left scale) and/or the top or bottom 10% (red, right scale), from early 1993.
From today, the market has closed in the top/ bottom fifth of its intraday range (blue) 52% of the time, and in the top/bottom tenth 30% of the time, over the last year. And while this is slightly more than the average over the entire test of 49% and 28%, it’s still very much in line with historical norms.
Looked at another way, the graph above shows a 1-year rolling average of the proximity of the SPY’s close to either the high or low of the day (whichever is closer). A value of 0% would mean that (on average) the market closed exactly at the high or low, and a value of 50% would mean it closed exactly in between the high and low.
Same conclusion: the market is not closing at intraday extremes with any more frequency than has been observed historically.
Having said that, I do think that these leveraged ETFs are a possible bogeyman should the market make an big black swan’esque move, but that’s really beyond the scope of what I’m going to account for (or fret about) in my own trading.
Filed under: Stock Market Mechanics | 1 Comment