Replies to post #35324 on Options Wonderland

[nlightn]

thanks for your input,...i agree,..one would think that SKF should not even be trading,...go figure.

GLTY with your trading 2day.

[GotOptions?]

I would hardly call this a financials recovery just yet:

[swinging for the fence]

Why Two Financial Short ETFs Stopped Trading
Monday September 22, 11:29 am ET
By Simon Maierhofer


In its infinite rule-making wisdom, the SEC has added yet another caveat to the already unsettled financial world. Banning the short sale on 799 financial securities has caused 'liquidity' problems for a set of ProShares Financial ETFs.

Following the announcement of the ban on short sales the ProShares UltraShort Financials (AMEX: SKF - News) and the ProShares Short Financials (AMEX: SEF - News) stopped trading for a good portion of Friday morning. This break was sorely needed to give ProShares a chance to sort through the implications of the ban.

What caused the halt in trading?

Financial short ETFs were affected even though short ETFs don't actually short the underlying securities. Swaps and futures are typically used to produce inverse returns. Swaps are custom contracts between institutions. In return for a fee from ProShares, the counterparty agrees to pay the return (or inverse return) on an agreed-upon index.

How does the counterparty hedge their position? Through short sales. Can you see how the restriction of short sales would reduce the amount of counterparties willing to take a risk without hedge? To further complicate the matter, it should be mentioned that counterparties include companies such as Merrill Lynch, Morgan Stanley, Goldman Sachs (and at one time Lehman Brothers), all of which are pre-occupied with simply staying alive.

There appears to be an exemption for ETF and ETN market makers to short financial stocks. ProShares does not short equities (at least so far) and it is unclear whether this exemption extends to counterparties. Needless to say, Morgan, Merrill, Goldman and co. do not want to further agitate the SEC and prefer to be on the safe side.

How does this affect the price of SKF and SEF?

The existing ETFs will continue to trade. Redemption of ETFs is not an issue, there won't however be any new units created. Scarcity of a product drives up the price, therefore it is expected that SKF and SEF will trade at a premium.