I do think the folks at ZeroHedge have raised a very real concern about what happens if the HFT programs are suddenly turned off at a moment of intense market volatility. Seems like we could hit a huge air pocket where there is essentially no liquidity. Couple that with the proliferation of leveraged ETFs and I do worry that there is the potential for a 1987-like event. There is no doubt that the leveraged ETFs have blow up risk -- they are synthetic and they use swaps and who knows who the counter-parties are and what might happen to them. I don't think it's possible to know how the leveraged ETFs will act in an out-of-the-envelope event, which is an additional reason to be vigilant about not having too much capital at risk in leveraged ETFs at any moment in time -- long, or short. As to how they will perform on the short side -- I think that's equally unknowable. 

One thing that I've worried about, and discussed with brokers without ever being able to get an answer, is this: If you are short a leveraged ETF which blows up, will you end up with a "terminal short" that makes you a lot of money? Or might you end up getting caught in the world's worst-ever short squeeze because you can't buy back the shares to cover at any price, or at any "reasonable" price? One person I discussed this with drew what I think is the appropriate analogy: When you are short a leveraged ETF you have effectively sold a naked put with infinite risk. Which leaves me believing that -- at least on a theoretical basis -- there is even more potential risk in shorting leveraged ETFs than in being long them. Would be interested in others thoughts on this.