Short Scenario 1: Short Covering
In this scenario, a theoretical short squeeze situation is examined. Because of the continuous issuance functionality realized in the creation and redemption process, there can never be a traditional short squeeze in an ETF. When you examine the process of what happens in an ETF in which the underlying basket is rising rapidly and the shorts begin to cover, you can see how this functionality removes that risk. Using the lending tree example, if investor A sells his position in the market, then investor B (the borrower) potentially needs to find a new borrow for the short or close out the position. There are several options in this scenario:
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The stock loan desk that first found the borrow will be able to borrow ...
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