The Exchange-Traded Funds Manual, Second Edition

CHAPTER 10

Leveraged Long and Inverse Exchange-Traded Funds

TRADING SARDINES

Once upon a time, during a bull market in an earlier century, the eastern end of Wall Street was close to the southern end of the Fulton Fish Market. Before the fish market moved to the Bronx and before there were any ETFs, it was not unusual for Wall Street workers and workers in the fish market to cross paths, especially during their lunch hours. On one memorable day, a legendary Wall Street stock trader was making his way through the fish market when he came across a scene that would warm the heart of any trader.

A stocky man wearing a rubber apron and boots was standing on the back of a truck selling cases of canned sardines in transactions with a small crowd that had gathered around the truck. The stock trader watched for a few minutes to observe the banter between the sardine trader standing on the truck and the buyers and sellers in the crowd facing him. When the stock trader thought he saw an opportunity he shouted, “Buy three (cases) at ($)105!” A few casual observers stood aside to let him get closer to the action and he began a frenzy of bidding and offering—and trading—in what had become a “crowd” of sardine traders.

By the time his lunch hour was over and he had to return to work on the stock exchange floor, the stock trader had disposed of all the sardines he had purchased—except for a single case—and he had cleared a little over $5,000. He kept one case of sardines because he thought ...