Did The TVIX News Leak?

March 23, 2012

TVIX’s price collapsed yesterday hours before Credit Suisse issued news that might explain the plunge. What was up with that?

 

The VelocityShares Daily 2X VIX Short ETN (NYSEArca: TVIX) plunged more than 30 percent yesterday, as the product—which had been trading at a substantial premium to its underlying net asset value—came back to earth.

The story has been reported widely by everyone from us to Kid Dynamite, and its basic outline is well known. But there are some interesting new wrinkles to consider here.

On Feb. 21, Credit Suisse—the underwriting bank for the ETN—halted creations on the product. The ETN had seen significant inflows of new money, and Credit Suisse said it had burst through “internal limits” on its ability to hedge the underlying exposure. As a result, the firm said it would no longer issue new shares.

Demand for TVIX, however, continued, and as rising demand met a fixed number of shares, TVIX began to trade at a premium: first a little, and then a lot. By the time the market closed two days ago, TVIX was trading at a premium of nearly 100 percent: The product closed at $14.42 a share, but the actual net asset value was $7.81.

TVIX continued to trade at that premium until about 11:10 a.m. Eastern Time yesterday, when the product started to fall.

By noon, the price had fallen from $14.39 to $13.28—a drop of 7.7 percent. The selling accelerated, and TVIX closed the day at $10.20. By the time it was all over, $172 million had disappeared in the sell-off, and TVIX was down 30 percent.

To put this move in context, the ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY) ended the day 2.2 percent higher at $18.17 a share. UVXY provides nearly identical exposure to TVIX; absent premium and discount issues, the two should track each other very well.

What Caused The Premium To Collapse?

Throughout the day yesterday, stories were circulating on what had happened in TVIX.

Everyone knew that the premium would collapse eventually — don’t they always? — but the question was, when?

Barron’s called it “Thursday’s Oddest Trade,” and wondered aloud about what could have caused the collapse.

 

At the end of the day, at 7:42 p.m. ET, we got our first hint: Credit Suisse issued a press release stating that it was temporarily reopening creations of the product. In other words, it was going to start issuing new shares.

Reopening the product for creations would inevitably cause the premium to collapse, as investors could arbitrage the difference between the price and the NAV.

But why did the premium start collapsing at 11:10 a.m., when Credit Suisse didn’t announce anything until 7:42 p.m.?

Based on our internal analysis, there were no SEC filings or press releases that would have precipitated the 11:10am sell-off. The only official notice was the press release at 7:42 p.m.

 

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