How shorting an ETF affects the underlying stocks

Discussion in 'ETFs' started by Kramer_Hedge_LA, May 29, 2007.

  1. Anybody know if shorting an ETF affects an underlying stocks in the basket? If so, how and why?

  2. Larger ETF trades have more potential to influence the underlying components of the ETF itself. If somebody does a "large" short-sale, the person on the other side of the trade might lay it off against other ETF's, index futures, options and/or the underlying stocks in the basket.
  3. What does laying it off against the other mean?

  4. He does the opposite trade somewhere else...........a trader buys 1,000 shares of a stock and then short-sells ("lays off") 800 shares of a correlated stock against it. A trader buys 1,000 shares of a stock and buys ("lays off") 20 put contracts against it. A trader short-sells some S&P futures and also buys ("lays off") some SPIDER shares against it.
  5. So "laying off" is just a synonym for hedging. This all sounds a lot like arbitrage to me.
  6. That's what it is. Every ETF has registered market markets, generally some of the big brokers, who are able to create or redeem ETFs against the respective basket of underlying stocks. If the underlying basket of stocks has a price delta > x vs. the ETF these market makers can try to make risk free profits by arbitraging the ETFs against the stocks.

    Therefore the number of existing shares available for each ETF will generally fluctuate with the amount of funds flowing in/out of them.