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One question I have about Burry's comments that isn't (directly) addressed in this article relates to Burry's observation that trading volumes are remarkably lo

by AlanYx 7y ago

One question I have about Burry's comments that isn't (directly) addressed in this article relates to Burry's observation that trading volumes are remarkably low relative to the value of assets pegged to the equities being traded. For example, he remarks that over half of the S&P 500 stocks trade under $150 million daily, despite trillions of dollars in assets globally indexed to those stocks. (And he notes that almost half of Russel 2000 stocks trade at less than $1 million during the day.) My question is, does this imply that there's substantially more synthetic indexing (without ownership of the underlying securities) than we realize? If there are trillions in indexed assets where the funds owned the majority of the index components, wouldn't average daily inflows lead to higher trading volumes than we're seeing? Or are the market makers such a huge portion of the market that they act as a massive collective buffer causing very few shares to actually be traded?

sokoloff 7y ago
> (And he notes that almost half of Russel 2000 stocks trade at less than $1 million during the day.) He notes that 456 (a little under a quarter) of the Russell 2000 trade less than $1MM/day: "“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day." S&P index funds have an annual turnover of around 2-4% of AUM typically, so the transaction need to track closely is perhaps not as high as one might think.
omarhaneef 7y ago
I assumed he was talking about the futures market. The SP500 and Mini-SP500 contracts. The volumes are high -- I don't know if they're in the trillions (depending on how you count them) -- but they're high. That would constitute "synthetic indexing" in the sense you are talking about.
travisoneill1 7y ago
As the manager of the ETF you could allow it to float freely in which case it could trade at a premium or discount to NAV. But it wouldn't move too far because this would attract arbitrageurs who would trade the ETF against the individual stocks and bring it back in line. This would result in volume in the individual stocks. Another way you could do this is hold a pile of units in reserve and actively sell into the market when the ETF trades at a premium and buy when it trades at a discount. This approach would not result in any volume in the individual stocks (except for re-balancing from time to time). I think what he is saying is that ETF's use the latter approach. Of course this could also be done in an totally synthetic manner, but I don't think that index funds do this. It would be messy.
- nickles 7y ago
  > As the manager of the ETF you could allow it to float freely in which case it could trade at a premium or discount to NAV. ETFs are securities that trade freely. They may be open ended or closed ended, but the price of both is determined independent of NAV. > But it wouldn't move too far because this would attract arbitrageurs who would trade the ETF against the individual stocks and bring it back in line. This is the creation/redemption mechanism and is actually responsible for keeping the market cap of open ended ETFs in line with the NAV. Closed ended funds don't have such a mechanism, so the cap may diverge from the NAV. > Another way you could do this is hold a pile of units in reserve and actively sell into the market when the ETF trades at a premium and buy when it trades at a discount. This approach would not result in any volume in the individual stocks (except for re-balancing from time to time). This defeats the tax advantages of the ETF structure. Instead of having the manager buy and sell names, APs (authorized particpants) do the trading, hedging with units of the ETF. They then do an in-kind exchange with the fund manager at the end of the day. If the AP has net purchased the underlying basket, they will exchange the basket for shares of the ETF (creation). If the AP is net short the basket, they will exchange their offsetting ETFs for the underlying basket (redemption). This should affect the volume of the constituents. Some ETFs do not require creation and redemption to be done with the full basket of index members. These tend to be based on names that trade less frequently. In this case the manager allows a subset of the index to be exchanged. In this case, the creation/redemption mechanism will not necessarily affect the volumes of all members of the index. Note that this can could cause tracking error. Managers will rebalance when the index the fund is based on changes. For example, bond ETFs generally rebalance once a month. Market cap weighted ETFs (as opposed to, for example, equal weighted ETFs) are easier for managers as well, because the fund doesn't need active rebalancing.

by AlanYx 7y ago

sokoloff 7y ago

> (And he notes that almost half of Russel 2000 stocks trade at less than $1 million during the day.) He notes that 456 (a little under a quarter) of the Russell 2000 trade less than $1MM/day: "“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day." S&P index funds have an annual turnover of around 2-4% of AUM typically, so the transaction need to track closely is perhaps not as high as one might think.

omarhaneef 7y ago

I assumed he was talking about the futures market. The SP500 and Mini-SP500 contracts. The volumes are high -- I don't know if they're in the trillions (depending on how you count them) -- but they're high. That would constitute "synthetic indexing" in the sense you are talking about.

travisoneill1 7y ago

As the manager of the ETF you could allow it to float freely in which case it could trade at a premium or discount to NAV. But it wouldn't move too far because this would attract arbitrageurs who would trade the ETF against the individual stocks and bring it back in line. This would result in volume in the individual stocks. Another way you could do this is hold a pile of units in reserve and actively sell into the market when the ETF trades at a premium and buy when it trades at a discount. This approach would not result in any volume in the individual stocks (except for re-balancing from time to time). I think what he is saying is that ETF's use the latter approach. Of course this could also be done in an totally synthetic manner, but I don't think that index funds do this. It would be messy.

nickles 7y ago
> As the manager of the ETF you could allow it to float freely in which case it could trade at a premium or discount to NAV. ETFs are securities that trade freely. They may be open ended or closed ended, but the price of both is determined independent of NAV. > But it wouldn't move too far because this would attract arbitrageurs who would trade the ETF against the individual stocks and bring it back in line. This is the creation/redemption mechanism and is actually responsible for keeping the market cap of open ended ETFs in line with the NAV. Closed ended funds don't have such a mechanism, so the cap may diverge from the NAV. > Another way you could do this is hold a pile of units in reserve and actively sell into the market when the ETF trades at a premium and buy when it trades at a discount. This approach would not result in any volume in the individual stocks (except for re-balancing from time to time). This defeats the tax advantages of the ETF structure. Instead of having the manager buy and sell names, APs (authorized particpants) do the trading, hedging with units of the ETF. They then do an in-kind exchange with the fund manager at the end of the day. If the AP has net purchased the underlying basket, they will exchange the basket for shares of the ETF (creation). If the AP is net short the basket, they will exchange their offsetting ETFs for the underlying basket (redemption). This should affect the volume of the constituents. Some ETFs do not require creation and redemption to be done with the full basket of index members. These tend to be based on names that trade less frequently. In this case the manager allows a subset of the index to be exchanged. In this case, the creation/redemption mechanism will not necessarily affect the volumes of all members of the index. Note that this can could cause tracking error. Managers will rebalance when the index the fund is based on changes. For example, bond ETFs generally rebalance once a month. Market cap weighted ETFs (as opposed to, for example, equal weighted ETFs) are easier for managers as well, because the fund doesn't need active rebalancing.