insider-trading, News

Father-Son Insider Traders Provide Window Into ETF Markets, TD Ameritrade Phone Surveillance

The SEC’s administrative action against Spencer Mindlin & Dad yesterday had me scratching my head, and not just because TD Ameritrade managed to record a conversation between Mindlins père and fils when they had Ameritrade on hold. That should not be possible.

From what I’ve seen of this case it really doesn’t look like insider trading to me, though I’m always less willing to see insider trading than, say, the SEC is. But more interesting to me is what the case shows about the ETF market.

Here’s the gist of the SEC’s complaint. Goldman was long a lot of shares of XRT, an ETF on an equal-weighted index of retail stocks. Goldman hedged by selling shares of the underlying index components. (Delta one, remember?) The index rebalanced quarterly, including sometimes adding and deleting stocks. When that happened, Goldman would adjust its hedge, shorting the added stocks and buying in the dropped ones. For instance, on December 21, 2007, the index added shares of Sport Supply, a small-cap illiquid company. Goldman sold shares of Sport Supply on the rebalance date. So did other banks with similar positions, though Goldman’s may have been the biggest. The result was that Sport Supply got crushed, dropping from $9.18 to $7.00 that day.

If you knew that chain of events in advance you could do things like short Sport Supply, or buy puts on it, in advance of Goldman’s trading, and profit from the decline. Mindlin apparently did, and he did. So, fine.

Here’s what his lawyer has to say about it:

“This is a situation where a son working in the securities industry suggested a trading strategy to his father and helped the father understand and execute the strategy,” said the attorney, Robert Knuts of Park & Jensen LLP. “That strategy was not based on any confidential information obtained by the son.”

Mr. Knuts added that the strategy was based on a well-known rebalancing tactic within the ETF industry and on publicly available information.

Now, that seems obviously right to me. Mindlin junior did apparently say vaguely sneaky-sounding things to his dad, but that doesn’t make him an insider trader. The rebalancing of the index, and of XRT, were publicly announced, in advance. Mindlin had no inside information about those things. He knew that banks would adjust their hedges, but the mechanic of hedge adjustment is obvious – you just equal-weight the shares in the index. The only nonpublic information that the SEC claims the Mindlins had was Goldman’s position. But as the SEC says, other dealers adjusted in the same way. It doesn’t matter what Goldman’s position was. All that matters is that a lot of dealers would be hedging by selling Sport Supply on the rebalancing date.

Okay. But the surprise to me is that the SEC complaint – and the lawyer’s response – leaves out the other side of the market. Here’s my naïve understanding of how an ETF works: State Street sells a share of XRT to you. That share of XRT represents a claim on 1 share of Stock A, 1 share of Stock B, 1 share of Stock C, etc. [I am stylizing this as equal-number-of-shares-weighting; it’s actually equal-dollars weighting so it’s really $1 worth of Stock A, etc., but who cares.] State Street takes your money and goes and buys 1 share of Stock A, 1 share of Stock B, 1 share of Stock C, etc.

So now imagine the following setup:
1. State Street sells 17 million shares of XRT, buys 17mm shares of Stock A, 17mm shares of Stock B, … 17 million shares of Sport Supply
2. Goldman buys 4.35mm shares of XRT, JPMorgan buys 3mm shares, ….
3. In total banks own, pick a number, 10 million shares of XRT
4. They hedge that exposure by selling 10 million shares of Stock A … 10 million shares of Sport Supply.


So if the ETF works like that, on the rebalancing date, banks sell 10 million shares of Sport Supply, and State Street buys 17 million shares of Sport Supply. So Sport Supply goes … up?

Now this is obviously – from the world-class, down-22%, worse-than-MS-today accident that happened to Sport Supply on the rebalancing date when Spencer Mindlin and Dad made their sweet, sweet … $24,608 in profit – not what happened. What happened instead is – has to be – State Street buys 17 million shares of Sport Supply, and banks sell … 50 million shares or something. Because the banks are long 50 million shares of XRT.**

Meaning that the banks are long a very large multiple of the number of shares of XRT that exist.

You can’t really do that with stock, normally, but you can with ETFs. Coincidentally FT Alphaville ran something about this very ETF just about a year ago:

Take the SPDR S&P Retail ETF (NYSE: XRT) as an example. The number of shares short was nearly 95 million at the end of June, while the shares outstanding of the ETF were just 17 million. The ETF was over 500% net short! Or to look at it from another perspective, the ETF’s operator, State Street Global Advisors, believed that there were 17 million shares of the SPDR S&P Retail ETF in existence and owned shares in the S&P Retail Index portfolio to underlie those 17 million ETF shares. But, in the marketplace there were another 95 million shares of the ETF owned by investors who had purchased them (unknowingly) from short sellers. 78 million of those ETF shares were naked short–the short seller had promised their prime broker to create those non-existent shares if necessary to cover their short in the future. In both cases the share buyer, however, is completely unaware his ETF shares were purchased from a short-seller and no doubt assumes the underlying assets in the index are being held by the ETF operator on his behalf, but no such underlying stock is actually held by anyone. Clearly this creates a serious counterparty risk and quite possibly the potential for a run on an ETF—where the assets held by the fund operator could become insufficient to meet redemptions.

Sort of true – but the Mindlin case if anything suggests we should be less worried. It shows that hedged long ETF investors (i.e. dealers) are much bigger, at least in XRT, than hedged short ETF investors (like, for instance, the ETF itself). It also suggests that concerns that the “share buyer is completely unaware his ETF shares were purchased from short sellers” are overblown. The buyers of ETF shares, at least in XRT, are dealers – they know that they’re facilitating shorting, they’re unlikely to run on the ETF, and they’re hedging the risk in the underlying stock.

** From State Street’s filings, it seems like XRT bought about 280k shares of Sport Supply in December 2007. The SEC complaint claims that Goldman had to sell 225k shares of Sport Supply to adjust its hedge. So XRT’s position in Sport Supply is slightly bigger than Goldman’s short – but not much bigger, and apparently meaningfully smaller than the combined short of all the dealers who own XRT.

(hidden for your protection)
Show all comments

87 Responses to “Father-Son Insider Traders Provide Window Into ETF Markets, TD Ameritrade Phone Surveillance”

  1. just_looking says:

    If the AMTD clerk hit 'mute' and not really 'hold' then they would be recorded.

  2. Guest says:

    Chart needed

  3. guest says:

    Good job Matt, interesting.

    • Matt's Mom says:

      I find it amusing that after all the verbal beatings that Matt has taken since joining DB, some now feel it's necessary to express approval of his articles as if he needs a morale booster to keep at his job. But I like some of you have come around to seeing the benefits of having Matt at DB.

      • Guest says:

        I think mostly because the crowd that misses Equity Private wants to make sure that the crowd than ran Kouwe out of town on a rail doesn't achieve the same goal with Matt as his posts are far more interesting to the former crowd, well-researched and, well, not plagiarized.

        – UBS Crowd Quant

  4. guest says:

    These two clearly have not been listening to me. Oh well, [censored phrase from mid-90's disney movie]

    – [Censored phrase from mid-90's disney movie] guy

    • Guest says:

      I respect you resilience but still must respectfully request that you fuck off and die.

      • Serenity Now says:

        When and why the f did this site all of a sudden get hijacked by P the Cable Guy, Golden Boy and H.M.G.?

        • Guest says:

          Wanna take bets on which is The Guy from Delaware, which is Analy_yst and which one is Ron Blarney?

          • P the cable guy says:

            Delaware is actually quite a nice state sir, and if you want to know what do for a living; I run money. I am quite good at what I do so my job affords me the time to enjoy db.

          • wahoo says:

            I'm in Delaware. Delawhere? Exactly.

            – Garth Algar

  5. Dark H. says:

    Picture doesn't match up – the situation appears to illustrate the son as an evil mastermind and the father as a clueless minion.

  6. Guest says:

    I stopped reading after Mr. Knuts….

  7. Golden Boy says:

    "Luke, join me in shorting BAC."

    -BAC intern to another BAC intern

  8. Steve says:

    Yet another insider trading post by Matt….

  9. Nailz6 says:

    These posts make me think Matt is conducting some serious insider trading.

  10. Guester says:

    NC;DR (no charts. didn't read)

  11. P the cable guy says:

    From what Matt has written this is just overzealous prosecution. Thanks for pointing out that all they did was act on public information that most of the public doesn't act on Matt. Great post.

  12. Edmond Dantes says:

    Dear Matt,

    Keep up the good work. For more on how retail lambs are being setup for their usual slaughter, this time via ETFs, please read here:

  13. uuuuuuu says:

    "Annals of TLDR" should be a tag here. Just saying.

    –Guy who just had 2 beers

  14. FinneganKristiansen says:

    Nice post Matt.

  15. Matt's Admirer says:

    It has become an habit that i scroll straight down to the comment section to see how many seconds it takes before deciding whether to read the content or not. Sometimes I get pleasant surprises from Matt (for once, I read it back to back and I enjoyed it so much that I had to read again!) While on the bad days, those delightful comments will keep me going through the day! Of course, Bonus points are always awarded to post with charts.

    – Matt's admirer

    P.S. Don't tell anyone mummy was here.

  16. Teddy says:

    UBS Sucks

  17. awful says:

    bess, PLEASE get rid of this guy. every post is just painfully misinformed. it is completely ruining the site.

  18. katz11 says:

    I have found here much useful information for yourself. Many thanks to the editors for the info

  19. Federico Bad says:

    Hello Webmaster, I noticed that is ranking pretty low on Google and has a low Google PageRank. Now the Google PageRank is how Google is able to see how relevant your webpage is compared to all the other webpages online, if you cannot rank high at the top of Google, then you will NOT get the traffic you need. Now usually trying to get to the top of Google costs hundreds if not thousands of dollars and very highly optimized targeted marketing campaigns that takes a team of experts months to achieve. However, we can show you how to get to the top of Google with no out of pocket expenses (free traffic), no stupid ninja tricks, no silly mind control techniques, and this will be all white hat with no blackhat software or tactics that could possibly land you on bad terms with Google and put you in the dreaded “Google Sandbox”. We’ll show you how to easily capture all the targeted traffic you need, for free, multiple ways to land fast (not months) first-page rankings in Google and other major search engines (Bing, Yahoo, Ask, etc), even show you strategies on how to earn daily commissions just try Ranking Top of Google, please check out our 5 minute video.

  20. This can be a good post. I am blessed to be reasonably skilled at setting up webpages but this a fantastic read through for anyone new into the scene.

  21. icematikx says:

    wow your site is absolutely fabulous. I just came here to tell you that I have a great domain too that you should visit. I’ve learnt lots of informative information from your blog and have updated my domain accordingly.

  22. This domain is fabulous. I have read every article almost so far. I cant believe how contextual your writing actually are. I would love to meet with you. Please contact me when you can. Much love

  23. This website is fabulous. I have read every article almost so far. I cant believe how contextual your pages actually are. I would love to talk with you. Please email me when you can. Much love

  24. Hi! Would you mind if I share your blog with my zynga group? There’s a lot of people that I think would really appreciate your content. Please let me know. Cheers

  25. Superb post here, thought I could learn more from but I can learn more from this post.

  26. (visit site) says:

    Hi would you mind letting me know which web host you’re using? I’ve loaded your blog in 3 completely different internet browsers and I must say this blog loads a lot faster then most. Can you recommend a good hosting provider at a reasonable price? Many thanks, I appreciate it!

  27. With havin so much content do you ever run into any problems of plagorism or copyright infringement? My website has a lot of completely unique content I’ve either written myself or outsourced but it looks like a lot of it is popping it up all over the web without my agreement. Do you know any methods to help protect against content from being stolen? I’d definitely appreciate it.

  28. Please let me know if you’re looking for a writer for your site. You have some really good posts and I think I would be a good asset. If you ever want to take some of the load off, I’d really like to write some content for your blog in exchange for a link back to mine. Please shoot me an email if interested. Thanks!

  29. Hello! This is my 1st comment here so I just wanted to give a quick shout out and say I really enjoy reading through your posts. Can you recommend any other blogs/websites/forums that cover the same subjects? Thank you!

  30. more info says:

    Hiya! Quick question that’s entirely off topic. Do you know how to make your site mobile friendly? My website looks weird when browsing from my apple iphone. I’m trying to find a theme or plugin that might be able to resolve this problem. If you have any recommendations, please share. Thank you!

  31. As to what, that’s what I’m hunting for, practically burning off pray with finishing our give good results, to which the materials were desired just to everybody by you!

  32. Rocco Bustle says:

    This website is known as a walk-via for all of the information you needed about this and didn’t know who to ask. Glimpse right here, and you’ll positively uncover it.

  33. You in fact consent to it become emerge uncomplicated with one is presentation yet We’ve this topic affiliate marketing truly meat parcel i consider A no expense without doubt without doubt not be aware of. It is apparently exceedingly complex as satisfactorily as incredibly broad in my opinion. I deem excited in your post, I beyond doubt stab to evade you have the belief from your usb slots!

  34. Heya are using WordPress for your blog platform? I’m new to the blog world but I’m trying to get started and set up my own. Do you need any html coding expertise to make your own blog? Any help would be greatly appreciated!

  35. I do accept as true with all the ideas you’ve presented for your post. They are very convincing and can definitely work. Still, the posts are very brief for starters. May just you please lengthen them a little from subsequent time? Thank you for the post.

  36. Rick Condren says:

    Aw, this was a really nice post. In idea I would like to put in writing like this additionally – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and not at all seem to get something done.

  37. Hello! Someone in my Facebook group shared this website with us so I came to check it out. I’m definitely loving the information. I’m bookmarking and will be tweeting this to my followers! Terrific blog and great style and design.

  38. Excellent do the job you’ve completed, this great site is actually cool with excellent facts. Time is God’s technique for trying to keep every thing from going on directly.

  39. I’ll right away grab your rss as I can’t find your e-mail subscription link or newsletter service. Do you’ve any? Please let me know in order that I could subscribe. Thanks.

  40. billig tandblekninng med laser…

  41. There are some fascinating closing dates on this article but I don’t know if I see all of them center to heart. There may be some validity but I’ll take maintain opinion until I look into it further. Good article , thanks and we wish extra! Added to FeedBurner as nicely

  42. Use a superb picture of Sir Stirling signing a hat to get a red-headed seven year outdated boy. (He was at the rear of me in line.) Sir Stirling at 83 sat from the sun for nearly an further hour so his followers could receive autographs. Truely a gentleman.

  43. if chomsky would get his possess daily life it could be the first fantastic deed he’s performed.

  44. As considerably as I understand, there is certainly no independent location approximately right here from the middle of nowhere. But I make a fairly very good dried cherry and blue cheese pizza. Generally I think it truly is due to the fact I make the crust from scratch. (I more or considerably less need to because my husband is latose intolerant as well as commercial types all have milk. Luckily he can consume blue cheese.) I set on jarred sauce and then the cherries and then the cheese. The sweetness with the cherries goes effectively with the saltiness from the cheesesort of like pineapple and ham.

  45. Thanks for your own hard work on this web page. My mom delights in doing research and it is obvious why. Almost all hear all relating to the lively means you give great ideas on this website and increase contribution from other individuals on the idea and our princess is actually being taught a great deal. Enjoy the remaining portion of the new year. You are conducting a powerful job.

  46. Yay! Congratulations Rachel! And thank you Steph for your awesome giveaway as well as honorable mention. :)

  47. It is becoming somewhat quite a bit extra subjective, nonetheless I substantially prefer the personalised advertising sign along with their appearance. They are typically colorful, offers a good deal a lot more exuberance, and provides several excellent antique attributes that can swiftly liven up the home. Placing amongst those people up will absolutely capture everybody’s attention. Talking about folks, the nostalgia signs can also be fantastic enjoyment, letting you bring other men and women with mutual likes and starting to become friends with these folks. Afterwards it’s possible you’ll promote the particular classic, ancient retro layout to other individuals, which can be enjoyable.

  48. what about Jana kramer?

  49. PERSONAL LIBERTY NEWS DESK: THANKS FOR THE ARTICLEObamathe party is over. Write down this word and put it on your deskNO!!! You cannot have another $50,000,000,000 for additional aid. Whenever you dream up another request for funds, look at the word NO on your desk. Remember that Delores Smith wants you to resign or be impeached. We all have goals in life. I do not like your agenda!Delores

  50. I have learn several excellent stuff here. Definitely price bookmarking for revisiting. I wonder how much attempt you set to create such a wonderful informative web site.

  51. This really is definitely a weblog that individuals need to obtain behind. The issue is, no one wants to complete an excellent offer of reading and not have some thing else to stimulate the mind. This is the internet, right after all. Perhaps if you added a video or two to emphasise your opinion. I’ll stick close to, for Sure|. But, I dont know if others will.

  52. kliknij says:

    Wow! Thank you! I always sought after to write proceeding my site something like that. Can I put into operation a fragment of your send to my website?

  53. Thank you for another informative site. Where else could I get that type of info written in such a perfect way? I’ve a project that I am just now working on, and I’ve been on the look out for such information.

  54. And so in case you’re buying a good opportunity considering the features: super solution, marketing and advertising along with sales materials, assist and much more … look into a property small business within the travel jaydeep biswas business.

  55. Commence by setting an advertising budget. A general rule of thumb is always to dedicate two to five percent of one’s expected gross sales to marketing. If you’re expecting $150,000 in gross sales, put aside $3000 to $7500 for marketing. For anyone who is just beginning your cleaning small business this might not be sufficient. You may need to invest more cash operating ads announcing your company so your possible jaydeep biswas customers know a brand new cleaning service is in town.

  56. Our site says:

    Wow, magnificent weblog layout! How lengthy have you been successively a blog for? you ended blogging glance painless. The largely expression of your website is great, as tidily as the content!

  57. Angry Birds says:

    I such as this web place vastly a great deal, Its a fantastically trivial berth to discover and incur facts. Our chief want inside years is really somebody who shall evade to achieve us accomplish that which you can. by Ralph Waldo Emerson.

  58. As before long as I finished appraisal through this send, I in basic terms had to read by means of your before posts and archives for additional. Keep it up!

  59. Francis Tusa says:

    Great post. I used to be checking continuously this weblog and I’m inspired! Very useful information particularly the ultimate section :) I handle such information a lot. I was seeking this certain information for a very long time. Thanks and best of luck.

  60. The good thing is that since the owner at least $5,000 in property damage PD is one facet of liability coverage. We also live in a stable job. B How does a typical building and personal property is that insurance companies are trying to understand exactly what it will impact your finances in the family, reduction in hours/overtime, etc. {||||

  61. San Diego: Lefty’s in North Park (Chi Style), Bronx in Hillcrest (NY style), Zia’s in Normal Heights (seriously gourmet). There’s no San Diego style, and that is for your most effective, I’m guaranteed.

  62. My brother samochody legnica is actually bugging me to show him making money online. But Now i’m really ecstatic because anyone can do it, and My partner and i finally get something super an easy task to share along with all my friends and family who usually ask me how they can make funds online. Just possibly be an web traffic brokerage. Anyone are capable of doing it. I will provide you with all the important points for cost-free…

  63. Some genuinely safe all along with beneficial in rank by this situate, moreover All the rage my opinion the fashion contains superb features.

  64. Frank Quealy says:

    Whats up. Very cool web site!! Guy .. Beautiful .. Wonderful .. I’ll bookmark your web site and take the feeds additionally…I am glad to locate a lot of useful info right here within the post. Thanks for sharing.

  65. Duche1977 says:

    Get more traffic FREE >>>>>> Click here to get 1 Million Guaranteed Real Visitors, FREE!

  66. What i do not realize is in fact how you are not really a lot more smartly-liked than you may be right now. You are so intelligent. You know thus considerably on the subject of this subject, made me for my part imagine it from numerous various angles. Its like men and women don’t seem to be interested unless it is something to do with Woman gaga! Your personal stuffs excellent. All the time handle it up!

  67. It’s been a while since I last posted, so thought I’d put another of my 2 cents in.I’ve now graduated up to a mod. Wow-eeee…these things are fun !!I 1st got the black box mod, n’ I LOVE it !! I get so much vapor out of it, I can’t tell U how great it is.

  68. Thanks for a marvelous posting! I definitely enjoyed reading it, you could be a great author.I will ensure that I bookmark your blog and will come back in the foreseeable future. I want to encourage you to ultimately continue your great writing, have a nice holiday weekend!

  69. Click here says:

    It’s an awesome article in favor of all the online people; they will get advantage from it I am sure.

  70. Can’t believe that I haven’t found your domain earlier than this. So far, I’ve read through 5 articles and have found them all to be unique. I’d like to personally say good job. I pray that you can continue writing worthwhile posts. I’ve bookmarked this post for later reading and added your feed to my list. Thank you.

  71. Simply wish to say your article is as amazing. The clarity in your post is just great and i could assume you’re an expert on this subject. Fine with your permission allow me to grab your feed to keep up to date with forthcoming post. Thanks a million and please carry on the gratifying work.

  72. Great post, thanks for the awesome article. I’m having troubles subscribing to your blogs feed. Thought I’d let you know

  73. More Bonuses says:

    I know this if off topic but I’m looking into starting my own weblog and was wondering what all is required to get setup? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web smart so I’m not 100% positive. Any tips or advice would be greatly appreciated. Appreciate it