The story here—maybe—is that short-sellers saw the “irrational” high price as the trading price of ASHS bounced from $37 on July 8 to $53 on July 10, and pounced to take advantage. Of course, to put that big a short on, you have to be able to borrow it. The evidence would suggest that the APs were more than happy to step in, create new shares and loan them to the shorts for a pretty penny (ASHS has the most expensive rating for borrowing costs by Markit).
And once the trade started paying off and the premium collapsed, the shorts left, and APs redeemed those shares back into Deutsche, shown here happening on July 13.
The Moral Of The Story
First, I want to acknowledge that forensics like this are really squishy. Both short-reporting and flows-reporting can be subject to lags, which are often impossible to tease out. My suspicion here is that the flows numbers we’re calculating are lagged by one day, which is actually the norm for flows reporting. That would put the creations happening more cleanly with the highest shorting, and the redemptions happening right when the short interest collapsed.
But importantly, at a micro scale, these kinds of transactions happen all the time. ETFs trade to slight premiums and discounts, short-sellers and APs look for short-term opportunities, and ETFs trading prices snap into fair value.
Broken Market Consequence
The reason these charts look so dramatic is because the underlying market is broken, so moves and gaps that normally happen in pennies in basis points happen in dollars and percentages.
And the coolest part is that this is evidence of the ETF structure doing exactly, precisely and beautifully what it’s intended to do. Just as the underlying market went to pot, the ETF became a price-discovery vehicle.
Once that happened, a whole raft of market participants stepped in to actually contribute—the short-sellers were part of it, the APs were part of it and yes, the enthusiastic buyers who drove the price of ASHS from $37 to $53 were part of it too.
And once the underlying market became, once again, at least slightly more liquid, the ETF snapped right back in line to advertised fair value.
At the time of this writing the author held no positions in the securities mentioned. Dave Nadig is the director of exchange-traded funds at FactSet Research Systems. You can reach Dave at [email protected], or on Twitter @DaveNadig.