We have had ten years of near straight-line declines in interest rates and suppressed volatility. Products are sold and structures are created on the basis of a continuance of trends. Things change and PAIN ensues. I don’t think it is a very bold statement to say the world has a lot of balls scattering around the table today based upon the recent ‘Putin Break.” Structured product wackiness and the billions of dollars of unsold debt sitting on investment bank balance sheets supporting near-term deal closes are canaries to watch.
A $905 Million VIX Note Goes Haywire After Barclays Halts Sales
By Sam Potter, Katie Greifeld and Emily Graffeo
(Bloomberg) — A $905 million exchange-traded note betting on stock volatility surged in heavy volumes on Tuesday after becoming untethered from the value of its assets following Barclays Plc’s move to stop issuing new shares.
Trading in the iPath Series B S&P 500 VIX Short-Term Futures ETN (ticker VXX) was halted five times in the first hour as the product jumped as much as 45%. Volumes were at one point more than 50% above the 30-day average.
VXX is part of a booming ecosystem of products riding equity price swings that have become notorious for starring in several market meltdowns. It’s suddenly in the limelight after Barclays on Monday temporarily suspended share issuance for the ETN — essentially, preventing new money from entering — because the bank lacked “sufficient issuance capacity.”
As a result, VXX continues to trade, but the mechanism that keeps its price in line with its underlying assets is misfiring. “When ETPs stop creations, they behave like closed-end mutual funds,” said Vance Harwood of consultancy Six Figure Investing. “Essentially there is no way to force them to track their underlying position.”
The exact reasons for the VXX pause are still unclear. Harwood speculates the haywire moves Tuesday may have been exaggerated by day traders driving the price up. Whatever the cause, it threatens to make the ETN even more expensive relative to the value of assets after closing Monday at a 5.9% premium — the highest level since another volatility product roiled U.S. equities in the “Volmageddon” episode four years ago. While VXX was up 20% as of 1:35 p.m. in New York, a gauge of the indicative value of the ETN fell 3.2%.
A spokesperson for Barclays declined to comment on the premium or Tuesday’s trading activity.
Since the price of VXX now depends in large part on demand for its shares, the rally has set up a short squeeze as investors who sold borrowed securities rush to cover their positions by buying more. More than 60% of shares outstanding were sold short as of Monday, according to data from IHS Markit Ltd.
“The high short interest in VXX was likely a catalyst to both the halt and the lift-off,” said Steve Sosnick, chief strategist at Interactive Brokers LLC. “It essentially turned
VXX into a meme stock, at least temporarily.”
The drama is the latest reminder of risks that come when complex strategies are packaged in easily accessible exchange-traded products.
VXX is a bet tied to a gauge of expected price swings on the S&P 500 called the Cboe Volatility Index, or VIX. Filings with the Securities and Exchange Commission say it’s intended as a trading tool “for sophisticated investors to manage daily trading risks.” Nonetheless, it’s available to most investors.
While Monday’s VXX premium was less than half of the level reached in February 2018 — when a broader panic gripped the volatility complex and multiple products shut down — the dislocation could increase as long as the issuance halt is in place. Back in 2012, Credit Suisse Group AG stopped creating new shares in the VelocityShares Daily 2x VIX Short-Term ETN (TVIXF, then TVIX) for about a month. The premium for the leveraged vehicle ultimately reached around 90%.
Barclays also halted issuance of the $188 million iPath Pure Beta Crude Oil ETN (OIL). That hasn’t split as far from its assets as VXX — it was at a small discount on Monday – but trading volumes Tuesday were about 250% above the 30-day average
as it fell 3.8%.
The bank said it expects to restart issuance for the ETNs “as soon as it can accommodate additional capacity.”
To view this story in Bloomberg click here:
https://blinks.bloomberg.com/news/stories/R8S8RVDWRGG5
