00:00It's not just crypto, though, James. I mean, you've got these leveraged funds on single stock names, even on commodities, and they're fairly, I mean, if you could call something dangerous, I would say these would be it, right? Particularly for a retail investor. What is the SEC's complaint?
00:16Yeah, I mean, dangerous is a good way to put it, honestly. So we have a lot of 2x ETFs. There's a lot of ETFs out there on single stock names. These issuers, what's happening is they're just pushing the envelope of what's allowed and what isn't allowed.
00:27They want to go as far out of the spectrum as they can. We've seen these guys file for leveraged single stock ETFs before some stocks, even IPO.
00:34And this is just another example of them really trying to push the limit to launch these 3x single stock or 3x, even 5x underlying asset names.
00:42And they were trying to get around a rule that was created by the SEC in 2020 that sets the rules around like what they can use, what derivatives can be used in a portfolio.
00:50It's roughly capped at 2x right now. And these issuers were just pushing the envelope.
00:54I bet if you talked to them and you got them to be completely open-minded about this, they probably thought this was a long shot.
01:00And I don't know if they would have tried it if the government hadn't shut down.
01:02But, yeah, these would have been a huge distraction, I think, at the end of the day.
01:05And I think it's good that the SEC isn't allowing these things to go through.
01:08Well, and there are some acting preemptively pro shares already withdrawing its triple leveraged cryptocurrency product applications.
01:17And I'm sure it won't be the only one. Maybe they intend to reapply at some point or resubmit.
01:22How do some of these ETFs work, though, James? Because they're not buying double the underlying products generally, are they?
01:28Yeah, no, they're using derivatives, swaps, options, whatever they can to generate the goal of these ETFs.
01:34So we have a lot of 2x products in the market.
01:36There are 3x products in the market that have been basically grandfathered in from before the derivatives rule.
01:41But what they do is they have swaps that they enter into.
01:44And the goal is to provide a given exposure over one day, one single day.
01:48That's the only goal.
01:49So if the underlying asset is up 5%, the goal of a 2x product is to be up 10% or more, depending on the leverage.
01:56The problem is, like, if you look at some of these on single stock names, particularly some of these meme stock names, quantum computing names,
02:02like if you're 3x inverse or long and these things go up 33% or more in the day or down 33% or more in the day, these things implode, right?
02:10So if you go back to a time like we saw in April of this year, there's a lot of these filings that if they had launched and they were available in April,
02:16they would have been through a liquidation event.
02:18So that's why I say it probably would have been a distraction.
02:20Most people playing with these things know they're playing with fire, most likely.
02:23But it just would have been a black eye in the ETF industry to be talking every other week or any sort of volatility,
02:28like, oh, this ETF imploded and had to liquidate because it went beyond its return.
02:34James, how many of them or have any of them imploded yet?
02:37I mean, they're relatively new, I guess, but this replication just keeps going on and on and on on Wall Street.
02:43Yeah.
02:43So, I mean, we're seeing tons, like I mentioned, people are filing for 2x single stock ETFs, inverse and long,
02:49on products that haven't even begun trading yet, right?
02:52So none of them really have imploded just yet because they're 2x only.
02:56So you need to go beyond 50% in a single day for these things to go down that bad.
03:01Granted, over the long term, they can still go down 99 plus percent, but they won't go through that liquidation event unless a 2x product,
03:07the underlying asset, goes up or down 50% in a single trading day.
03:11So whatever the underlying asset is is what determines that.
03:13That's why the 3x and 5x, probably we'd see a lot more liquidation events.
03:18Granted, we haven't seen that many.
03:19VIX is the biggest example.
03:20We saw one in, I think, 2018.
03:22There was an implosion due to what happened with VIX.
03:24But for right now, there hasn't been many because, again, it's capped at 2x.
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