A Chinese Currency ETN Behaving Badly

In the context of today’s unceasing trench warfare between massed armies of manipulators, it was little more than a bar-room brawl between off-duty corporals. But wild swings last week in the Market Vectors’ Remnimbi/USD exchange-traded note (CNY) showed the peril that awaits the unwary in placing market orders on thinly traded ‘stocks’ in violent markets. 

CNY ostensibly tracks the relationship between the US dollar and the Chinese currency. Ostensibly. On Sep. 17, it slumped more than 25 percent below its close Sep. 15. By contrast, the WisdomTree-Dreyfus Chinese Yuan (CYB) ETF declined less than one percent over the same period. 

It's not exactly clear why CNY behaved as it did; the chain of responsibility includes its promoter, Van Eck Global; the financial backer, Morgan Stanley (MS); the market-maker, Susquehanna International Group; and, ultimately, NYSE-Arca, the casino on which it lists. However the evidence — based on mile-wide spreads — would strongly suggest that Susquehanna was, at best, out to lunch. 

Investors had one solid reason to run from CNY; as an exchange-traded note, the shares are a debt obligation of Morgan Stanley, which was almost incinerated in last week’s burning of the investment banks. 

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NakedShorts first smelled a rat on Sep. 16, when the ETN was off five percent decline, against a bid-ask spread of roughly two percent of its last trade price; in the same time frame, CYB was down just 0.12 percent. 

NakedShorts put in several calls to Van Eck on the afternoon of Sep. 16, and was told that it was aware of the problem, and “working on it.” Whatever that “work” was, it did absolutely nothing for the ETN’s performance, which closed that day at $36.92 before plummeting to less than $30 in early trade on Sep. 17. At which point, it seems, someone finally got to work on eliminating the arb.

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Shortly before the close on Sep. 17, a couple of interesting datapoints: at left, the last trade is reported at $38.99, while the market is reportedly bid at $37.05; at right, the arbs are finishing their work, with the last trade at $39.24 and the bid still at $37.05. Volume has also surged, from just 37,400 shares traded Sep. 16, and 6500 on Monday, Sep. 15.

 

The table clearly demonstrates the misbehavior of CNY on Sep. 16-17, which continued, to a somewhat lesser extent, through the rest of the week. The ‘range,’ calculated as the difference between the high and low prices each day (i.e. $39.39-$29.37=$10.02 on Sep. 17) and expressed as a percentage of the prior day’s close, reached 27 percent on Sep. 17, compared with the range of less than one percent in CYB that day. It continued at elevated levels throughout the rest of the week.

The solution is obvious for anyone seeking exposure to Chinese currency; the WisdomTree product is much more liquid, trades at reasonable bid-ask spreads and is not subject to the vicissitudes of Morgan Stanley’s alleged credit-worthiness. That said, NakedShorts will not be joining you, for personal reasons relating to his refusal to invest in funds run by people who, well, let’s just say have a sustained record of erring on the side of slitheriness. 

Disclosure: CNY is a small (<2 per cent) core holding in a retirement account.

Comments

[PeteK:]

Due to the trade imbalance, and under the pressure from the US Gov, the Chinese currency has to go in value against the US$. Otherwise, it will be impossible for US made products to compete in the Chinese market. The way it's going, the Chinese currency will be up lots more
as time goes.

2008 Sep 26 03:55 AM

[pcat:]

We just don't need to give them anymore of our money.They wipe their asses with it right now but you might ask yourself why we keep changing our currency's security.Don't think too long.We found alot of the US money they were sending us to invest in our securities was counterfeited by them.We must stop them from printing worthless momey to compete with our worthless money.We must make all the old money worth only one percent of what the new money is worth,too.It worked for the French so why wouldn't it work for us? I know you think I am kidding but but I thought they were kidding when worldcom was declared broke.How can a company worth 23 billion one day and broke the next.Its called investment banking book keeping.They keep everyone beleiving a big lie while they keep shorting the stock because they know it will go broke but all the investors in the common stock will keep believing the PE,and other lies the company puts out.Nobody questioned the gs,ml or any of these dirtbags about what they knew and when they knew it.Only one guy went to jail and he was the ceo of wc and his job before that? He was a taxi cab driver from Tacoma washington.Nobody questioned any of those ah's why they would loan billions to a person with nothing,no education,no assets.The banks had all the protections from the 1933 banking act removed by bill clinton and they didn't take long repeating history.Its time they get kicked in the teeth and get in the same cell with wc's ceo.The trading places movie was more real than most people know.

2008 Sep 26 05:02 AM

[PeteK:]

Pcat, well said.

2008 Sep 26 05:25 AM