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ETFs Can Temper Market Crashes, Reduce Contagion

FYI: t took 32 years, but exchange-traded fund liquidity fear has gone ouroboros, coming full circle to eat its own tail. The Wall Street Journal warned in a recent article that authorized participants are now allowed to hold naked short positions in ETFs, and claims such practices could add to selling pressure in a market crash, and even put them at risk of failing.

But that’s backwards. Any naked short institution is making lots of money in a market crash, absorbing sell orders from others and reducing overall selling pressure. It’s levered long holders that generate counterparty risk and selling pressure in a crash.

WSJ Article:
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