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Spotlight on the Mother of all Structural Short-Covering Rallies

What do ETFs, create-to-lend, dark shorts and fails-to-deliver have to do with this week's mega short covering rally? Potentially everything, or nothing.

Warning: This is an entirely speculative post centred on my long-running (albeit somewhat anecdotally informed) hunch that "create-to-lend" (CTL) practices in ETF market-making have been generating larger than-appreciated naked short positions in the market. It is also a whopper.

Bloomberg reported on Monday that quants were being forced to shed $225bn of short bets in a big squeeze.

JP Morgan strategist Nikolaos Panigirtzoglou put this down to trend-following traders (CTAs) being compelled to unwind short positions totalling about $150bn in equities and $75bn in fixed income.

But as Bloomberg readily admits, it's hard to say for sure what's going on, or what is really behind the rally:

Getting a grip on the exact picture of the quant world is far from easy. Models built on subjective assumptions often spit out different numbers. A similar analysis by Nomura Securities International’s cross-asset strategist Charlie McElligott, for instance, showed that the systematic cohort bought a more modest $61.4 billion of stocks and $2 billion of bonds last week.
Still, the analysis helps shed light on the fierce rally, one that many say was an over-reaction to the softer-than-expect...

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