The Oil Bet Of UWTI(F): A Fool And His Money

December 09, 2016

I’ll admit it: I just had to be a part of it. We’ve covered here, over and over again, the pending demise of the VelocityShares triple leveraged oil ETNs backed by Credit Suisse: the VelocityShares 3x Long Crude Oil ETN (UWTI) and the VelocityShares 3X Inverse Crude Oil ETN (DWTI).

I wanted to have firsthand experience of what it was like to be an investor in one of these products during what has to be the most bizarre two days in ETF history. Here’s how I managed to throw $50 away in the process.

We first heard that UWTI was delisting these funds back on Nov. 17. Earlier this week, I was curious if I could still buy them. So on Dec. 6, I went to my brokerage account, and put in a marketable limit order for 10 shares of UWTI, the larger of the two, with $662 million in assets as of this morning. I didn’t receive any note about the pending delisting. However, I did get a note about how leveraged and inverse funds are risky and not for long-term investing. I paid my $9 commission and got a fill at $24.64.

Yesterday, knowing with absolute certainty that I was pointing a gun at my own head, I watched as the market closed, and then kept checking my account to see if anyone was going to let me know it was delisting. I received no emails or alerts.

In fact, I was half expecting to get a note from Credit Suisse letting me know it would indeed be calling my exchange-traded note shares, and giving me my money back (which has been the case in almost every other ETN delisting in history). Alas, no note has come.

The Story Gets Weirder

At 9:30 this morning, I logged back in to my account, curious what would have happened. A few things:

1) The ticker for UWTI had changed to UWTIF, and was now listed as OTC, or “over the counter.” That means that if I wanted to sell it, I would have to go to a different market: the OTCBB or pink sheets.

2) In a bizarre twist, overnight, VelocityShares (which is fundamentally just a marketing agent for these products) had found a new bank to replace the 3X oil products: Citi. At 9:30 a.m., two brand-new, technically unrelated securities, with the tickers VelocityShares 3x Long Crude Oil ETN (UWT) and the VelocityShares 3x Inverse Crude Oil ETN (DWT), were trading, providing essentially the exact same exposure as the now delisted UWTI(F) and DWTI(F), just 15 basis points more expensive.

Human Intervention

So, putting myself in the shoes of a normal non-ETF-nerd consumer, I did what I thought I should do, and called my broker. I contacted someone extremely nice on the phone immediately, and here’s the transcript of my conversation.

Me: “Hi there. I bought a small speculative position earlier this week, and now I find that it got delisted.”

Broker Dude: “It looks like we received notification of delisting last week. I can see if we sent out any notifications. Please hold.”

“Last week?” I thought? “This thing’s been on the delisting block since before Thanksgiving!” My very nice broker dude comes back …

Broker Dude: “When you went to buy it, was there any block that said ‘this is being delisted?’”

Me: “Nope, not that I can recall. Did you send out any sort of notice to people holding this thing?”

Broker Dude: “If you were a holder before we got the delisting notice, we would have forwarded you the delisting notice, but we didn’t send another one out yesterday.”

Me: “What do I do now? Can I sell it?”

Broker Dude: “Yes. Although right now, there’s no market [9:50 a.m.]. But you can put in the order and see what happens.”

 

Actually Selling

It became clear to me that this was pretty much the end of the line, so I decided I should at least try and get rid of this position. I popped open my Bloomberg and wondered if I could still get an intraday net asset value for the now-delisted UWTIF—it turns out you can, but the ticker there didn’t change.

In Bloomberg, the ticker remans “UWTIIV.” On most brokerage platforms, it remains “UWTI.IV.” Not exactly obvious if you’ve come to understand that the ticker itself now has that pesky “F” in it. The fair value was showing $25.50.

A quick look at the trading tape showed that not only was UWTIF trading, it was trading a lot. Almost 400,000 shares had traded by 9:50 ET this morning, more than 10x the amount that had traded in newly listed Citi-backed UWT. I took my medicine and put in an order, and got a fill, at $23.01, 10% below fair value.

 

 

In Memoriam

As of this writing, Credit Suisse still hasn’t suggested it’ll ever call these ETNs, which means selling in the open market at a huge discount is likely the only option for holders who woke up like me this morning: holding and dumb.

Someone on the other side of these trades is taking a risk—that they can roll up multiples of 25,000 shares and present them for redemption, and book the arbitrage between fair value and the discount they bought at. It’s a real risk, and one they should be compensated for.

In the meantime, there are roughly $573 million in idiots like me out there sitting on the other side, wondering which tickers mean what, and how to navigate the system with the least amount of pain.

All of the pieces of the system here, the plumbing, are in fact working as intended. But sometimes that system isn’t particularly pretty or investor friendly.

At the time of writing, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected].

 

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