Many observers have noted the dramatic increase of program trading and the decrease of volatility on the last three years. And also the ability of the program traders such as Goldman to make huge profits on a flat market.

In my view, this phenomenon is a result of the popularity of Exchange Traded Funds (ETFs). It used to be that program arbitrage trading was done with index futures on one side of the trade and stocks on the other. But this was clumsy because the futures expired only quarterly. ETFs, on the other hand, are a gift to the arbitrage trader. Because they can be shorted anytime (uptick rule does not apply), and are not in the indexes, and are optionable, you can do pretty much anything. Basic idea would be to short the ETF and go long the components. This will pump the index, so you would have bought calls on the index. Unlike with the futures, you can then deliver the shares of the components to the ETF sponsor anytime and receive ETF shares to cover your short position without having any trades go through the exchange. Buy programs are of course favored because the uptick rule does apply to the component stocks, so you don’t want to be shorting them.

These strategies appear to provide excellent low-risk profits at the expense of everyone else.