A $50 Billion Trade Fires Every Day Near the Close

I did the math wrong once. Years ago. I bought a fund that promised me twice the daily move of a stock I liked.

The stock could only go up, I figured. So double sounded better than single.

Months passed. The stock ended about where it started. And I was down. A lot.

I stared at the screen. The stock went nowhere. So where did my money go?

The answer was one word. Daily. The fund reset its bet every single day. Up days, down days, on and on. On a stock that chopped sideways, that reset took a little each day. The stock broke even. I did not.

But my small loss is not the story. Here is the story.

These funds are everywhere now. And together they have started to move the market itself.

About 200 billion dollars sits in leveraged funds today. In 2009 it was 30 billion. The money went into products that must do one odd thing. They must buy more after the market rises. And sell after it falls.

They do it every day. Near the close. All at once. All in the same direction.

This year that forced trading set a record. The daily rebalance ran to about 50 billion dollars a day and now takes up 1.60% of all S&P 500 futures volume. That makes it one of the largest mechanical forces in the market.

So the math runs backward from how it feels. A calm market barely notices. A fast one does not.

On a big up day, the funds buy into the strength. On a big down day, they sell into the weakness. The move feeds the funds. The funds feed the move.

It is a machine that chases. It buys high and sells low, by design, with hundreds of billions behind it.

I have no idea what day it matters. Maybe it already does, in the last ten minutes, when the tape lurches for no reason you can name.

That last hour is where I keep my eyes now.

The idea is old. Package a leveraged bet, sell it like a stock. For years that meant a broad index. Then it moved to single names.

The first single-stock pair launched in 2022. Now there is a crowd of them. Two times Tesla. Two times Nvidia. Two times the software firm that holds bitcoin. Three times the chip index.

Leveraged bets on SpaceX did more than a billion dollars of volume on their first day of trading. A record for the single-stock kind.

But most of these funds are small. About seven in ten hold under 25 million dollars. A long tail of tiny products, all fishing in the same few names.

And here is where it spreads. The borrowing is not the frightening part. The frightening part is what the fund must trade, and how little of the stock there is to trade against.

A two-times fund on a small stock has to buy after every up day. And sell after every down day. Near the close.

When the fund is large next to the stock's tradable shares, its trade stops being a footnote. It starts to set the price.

So the fund pushes the stock. The stock pushes the fund. Then it repeats the next day.

A fund built to track a stock can end up steering it.

Meanwhile, the same daily reset that cost me years ago is still at work in the background.

Over the past year Nvidia rose about 68%. A holder of the two-times fund did not double that. They kept close to 1.9 times the move, not two.

The inverse fund was worse. Built to move two times opposite, it lost about 76% while the stock rose.

Same stock. Different holders. The gap is arithmetic, not luck. The daily reset takes its cut from anyone who holds past the bell.

Three more things worth keeping track of.

First, same-day options. About six of every ten S&P 500 options traded now expire the same day they are bought. In 2020 it was closer to one in twenty. A whole market has shifted from weeks to hours.

Second, buffer funds. About 89 billion dollars now sits in defined-outcome products that use options to cap your losses and your gains. Another wrapper that promises a smoother ride, sold to people who want out of cash but fear the drop.

Third, bond funds in an ETF shell. These are on track to hold close to a third of the whole bond-fund market. You can sell the fund in seconds. The bonds inside can take days to sell. That gap is fine on calm days. We'll see about the rest.

In the 1980s, Wall Street sold a new kind of safety.

Two professors at Berkeley built it. They called it portfolio insurance. Their firm sold it to pension funds across the country.

The pitch was simple. You keep your stocks. A computer protects you. As the market falls, it sells stock-index futures for you. As the market rises, it buys them back. A floor under your losses, without paying for puts.

By the fall of 1987, an estimated 60 to 90 billion dollars ran on this kind of rules-based selling.

Then came Monday, October 19.

The market opened lower. The models did what they were built to do. They sold. The selling pushed prices down. Lower prices told the models to sell more.

The strategy was undone by its own popularity.

The Dow fell 508 points that day. Down 22.6%. The largest one-day drop in its history. One firm alone sold more than a billion and a half dollars of futures before the close.

A task force led by Nicholas Brady put that mechanical selling at the center of its report. Others argued the effect was smaller. The debate never fully closed.

But the shape of it stays with me. A rules-based trade. Set to the same index. Held by many at once. Built to sell as things fall.

The names have changed. The reflex has not. Machines still trade on rules. And the rules still point the same way at once.

We'll see.