FINRA recently ruled that ETNs (the one I care about is VXX) are no longer eligible for portfolio margining. I am not sure I understand the logic behind a blanket ruling like that. I understand that it may be desirable to prevent people from buying at a 1:6 or 1:7 leverage an ETN stock that can go belly up due to the parent's troubles, but as far as option risks and hedges working together in a portfolio margin account, I don't see what the fuss is about. Can somebody play FINRA's advocate please? It's not that we can do anything about it, but I/we may emerge wiser from the exercise.
I'd guess the ban is due to the fact that an ETN can track pretty much anything, so giving a client a large amount of margin to buy one could subject the lender to unusual risk, though I'm surprised they don't leave it up to the broker. (PM is not just about the options risk -- it's also about the underlying. For example, Pink Sheets stocks can't be margined via PM either, not sure whether that's a FINRA rule or broker rule though.) A related issue is that a lot of ETN's appear to be designed to go down ad infinitum "almost surely", and this seems particularly true of the volatility-tied ones. For example: http://finance.yahoo.com/q/bc?s=VXX&t=5y&l=on&z=l&q=l&c= So for PM, it might be a bad idea to loan a client money to buy something whose value is "almost surely almost 0", given even a moderate amount of time. Diverging a bit from the PM issue, every ETN I've looked at seems like a bad deal for everyone but the issuer, and possibly those who get to charge short interest on them (prime brokers/custodians?). So how are you able to earn anything trading them? Or are you just trading the options?
The track record of ETNs, at least the ones I am familiar with, are pretty good in terms of tracking what they claim to be tracking as well as any ETF. And even if one fine day one ETN does something funny it's no different than a company's CEO goofing up something or some other nasty surprise. The only thing that's riskier is the fact that the ETN is as good as the parent's solvency. In case the parent goes bankrupt the ETN doesn't have insulated assets, and it can go to zero. However, I assume Barclay's Bank (VXX's parent) is the kind of company that would be allowed to be portfolio margined. Then it's logically inconsistent to ban the ETN based on the risk of parent's bankruptcy. As for the ETNs "going to zero", sure, a lot of them do. That's why you don't deal with them in a simple-minded way. Certainly not buy-and-hold at any leverage. I have learned to deal with them through options. For me portfolio margin is not about leverage per se. It's about being allowed to take the actual risk implied by the overall set of your positions rather than the extremely exaggerated risk implied by Reg T. When portfolio margin is only $50,000, the Reg T margin can easily be $350,000. Not because portfolio margin is allowing you to do crazy things (although you can), but because it is aware of cancelling risks. And you can certainly blow your account in one hour in a Reg T account by putting all your money in some stupid far out of the money option on a boring company right before expiration. If somebody wants to be stupid, the only way to protect them is to ban them from the market. Actually Reg T restrictions might make the situation worse by making them run out of margin for no good reason, and panic out of their position.
See Zerohedge.com , May16, time 1734 (sorry cant copy/paste link from phone) For an excellent article regarding the ETN problem. They sound to me like mini hedge funds for the wealthy that can default but of course the bias of the the author is strong.
Yeah, the one that comes to mind for me is the VXX also, as far as the only ETN I have ever dealt with. But... could this not come as a result of a class action lawsuit by a group of sour grapes against a bank's ETN product (2X ETN on the long side no less! LOL), including one plaintiff "engineer" who lost $45K because he admittedly (according to article) didn't read the prospectus of TVIX and made a huge bet, then sued the bank when he lost 80%, even though he admittedly did not read everything about the product he was trading to begin with according to the article? http://www.bloomberg.com/news/2014-...eer-s-45-000-note-loss-spurred-sec-probe.html Best quotes from the Bloomberg article: I suspect this case has something to do with the recent blanket ruling on ETNs in general TBH. Seriously. They bet on the VIX, something pretty complex. They bet on short term VIX ETNs. Nevermind the contango issue and loss of rolling over futures positions. They bet with the 2X leveraged version on the long side too (presumably buy and hold) with all the decay added too. LOLOL! Seems like this group wants compensation for the loss? What is this socialism? If they are compensated for a loss in any way, where there is no fraud to begin with, then should everyone be compensated for every trading loss made in history? Geeze, I can come up with a whole list. I've made plenty of stupid mistakes myself. And then my total gains will be massive. This lawsuit is up there among the more frivolous looking I've seen. Like the one where the lawyer sued Carl Icahn because he lost money shorting Herbalife (eventually case got tossed out BTW). -80% loss aint all that bad anyway. Did anybody look at the gold miners? Some dropped 90% or more from the top. No leverage. Lower than '08. This is among the worst, as bad as the dotcom stocks, except the dotcoms that went bust to $0.
Retail people lose money and complain, media picks up sob stories about Evil Banks and their complex ETNs that are "designed to fail", and FINRA feels the heat. Like most regulators, their logic goes like this: Something must be done! This (regulation) is something. It must be done! It's been a long time since regulation by FINRA or the SEC was done purely to benefit the market structure and overall efficiency. These days it's all politics and covering their ass.
Thats true. Maybe brokers should start having retail clients read out loud statements that are recorded on tape to describe how they understand and assume the risks of trading before they are allowed to buy/sell anything, on top of the boiler plate 100 pages legal agreement everyone 'signs'. Actually, as for the Bloomberg article, I get the gist that article isnt worded in such a way that its on this group's side. Clearly the investors have the bear the risk of the products they are trading. And to then say "oh yeah I didnt know anything about it anyway", "but hey I'm an engineer whos good at math", and "I'm too busy with other stuff anyway can't you just make me free money"...... clearly shows whos the dolt here. I don't know about TVIX, but VXX prospectus have always made it clear its for short term plays. Furthermore, these guys trade the 2X leveraged version of an underlying as a buy and hold with all the decay [shakes head]. Sorry no case here. If I was a judge this one gets tossed out. But, I can see how someone who is very bleeding heart liberal will probably side with them and go after the "Evil Banks" as you say and give the lawsuit a chance at trial.
I remember using TVIX years ago when there was some volatility . In 2010 , Greece act1 , and 2011, only because i could get great fills from the US during the Europe session and moves Of 10-30 percent on occasion. What i dont understand is that i thought Everone knew these things were peices of shit. DTO(oil) was another. Its interesting that VXX has a "better" reputation. Do people realize that some ETFs went to 1 cent in the flash crash. I know these trades did not stand but 15% stops did. The guy should lose. Mutual funds are better for retail non pro day traders cause for these people, and mostly for myself, How does a stop loss help you. Finally, the concept of leverge (even 2 or 3x) for non professionals is ridiculous IMO. Sometimes for them as well.
Anyone is entitled to complain and file their own frivolous lawsuits. Anyone is entitled to blame everyone but themselves. Thats essentially it. Honestly, TVIX is like the worst of the worst. VXX is already a loser, with the contango and rolling over of futures. Reverse split after reverse split ad infinitum. But to then do it with a daily 2X return leveraged ETN on the VIX where you have the added negative of decay. Its just asking for trouble doing buy and hold. All in all, anyone who does 'buy and hold' clearly did not understand what they were buying into. Or they were poor traders not cutting losses. Or they were huge speculators looking for those 30% pops that never came. As such it is 100% their fault. These products are clearly for short term trading or from some kind of complex portfolio hedging position. I think many of these people saw those massive spikes of 30% and decided to chase it, thinking they can time the market and catch one of those spikes, but instead they held on while it continued to drop. And then they were at point of no return and decided to blame everyone but themselves, so they do a little lawsuit.