ETF Admonitions from a Reader

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I received this interesting email earlier today, which I am publishing with the author's permission:

I benefit tremendously from your work and don't want to see you get screwed by the system.  Holding FAZ last Thursday was a disturbing experience.  The NASDAQ canceled all sell orders during the crash and into the close.  I was lucky to exit in the after hours market, having been cheated out of 15% unrealized profits.  This was a warning to all ETF holders.

Exposure to ETFs have serious hidden risks right now.  The system wide lockout was almost entirely on ETFs.  The cancels went to every retail broker, per TDAmeritrade's operations desk.  There's nothing they can do when the exchange fails.

Anyone holding ETFs (particularly ultra shorts) won't be able to take profits on the next crash.  These "stocks" are wholly based on derivatives products.  They're unregulated instruments moonlighting on regulated exchanges.  Instead of mortgage backed securities causing havoc, the next blow up will be interest rate and currency swaps.  Same game, but on a different street corner.  When these markets seize the underlying contracts won't get marked-to-market.  Remember, they simply mimic an index.  Imagine pricing SPY in reverse.  If it was based on no-bid call options how would you price the index.  When this happens exits on ETFs will be slammed shut.

Is anyone talking about this right now?  Everyone trading ETFs needs to understand their true underlying market.  Hopefully my research will be of use.  Unfortunately, it's incomplete and disjointed as I decode the complex derivatives market, which I do not trade.

More background on the subject: