Last update: October 11, 2022
VXX Used To Be The Favorite Of Volatility Traders
- VXX was the first volatility ETF/ETN product (inception date: January 30, 2009).
- It was very liquid.
- No other volatility ETF/ETN had more liquid options than VXX.
And all of a sudden, Barclays, the issuer of VXX, announced on March 14, 2022, that any further issuances of the popular ETN had been suspended.
This article summarizes the events as they unfolded between March 14 and September 26, 2022, including the many valuable learnings for volatility traders.
The Big Shock – March 14, 2022
On March 14, 2022, Barclays (the issuer of VXX) surprised with the announcement that effective immediately any further sales from inventory and any further issuances of the widely traded volatility ETN have been suspended.
Within hours, VXX was trading significantly above its indicative value. Social media was abuzz with traders asking themselves questions such as:
- Is VXX broken?
- Is a GME-like short squeeze coming for VXX?
- Will this popular volatility ETN be delisted soon?
What exactly happened?
- VXX is a liquid long-volatility, 1x leveraged ETN.
- Shortly before the market opened, Barclays issued this announcement.
- Without providing any reason(s), Barclays informed market participants that it had suspended any further sales from inventory and any further issuances of new shares.
- VXX was not the only ETN to be affected. OIL, a crude oil ETN, was suspended too.
- Until noon, VXX was trading in line with its indicative value.
- Based on the underlying index tracked by VXX, the indicative value is calculated. This number states at what price VXX should be.
- As the chart shows, VXX (orange line) was tracking its indicative value based on the underlying index (blue line) perfectly up till noon.
- Just after noon, VXX started trading significantly above its indicative value.
- This means that market participants were paying more than VXX was worth.
- Over the course of the afternoon, the gap was widening. Around 3:35 pm, VXX traded roughly 11% above its fair value.
- At the close, the premium was around 7.5%.
How can VXX trade above its fair value?
In theory, VXX is subject to the forces of demand and supply – like any other stock. However, an ETN or an ETF are supported by so-called authorized participants who ensure that quotes stay in line with indicative values (for more info).
- In a normal situation (i.e., prior to the suspense announced on March 14), the authorized participants buy VXX when the quoted price falls below the indicative value.
- Similarly, they sell VXX when the indicative value is lower than the quoted price. This process is called “selling from inventory”, “creating new units” or “issuing new units”.
- As a result of the buying and selling by authorized participants, VXX should always stay close to its indicative value.
According to the announcement, Barclays has suspended this mechanism. As of March 14, VXX will see no sales from inventory and no creation of new units.
- VXX is now susceptible to the forces of demand and supply.
- VXX is a heavily shorted ETN, suggesting that demand could be greater than supply – even at a significantly higher price.
What does history tell us?
Even though volatility ETF and ETN products have been around for 13 years only, similar events have happened in the past.
- In February 2012, Credit Suisse suspended the issuance of new units in TVIX (a 2x leveraged volatility ETN).
- Credit Suisse had introduced TVIX shortly before and was not expecting the huge success in terms of volume. As a result, the TVIX ETN became so large that it violated the risk management rules of Credit Suisse.
- On February 22, 2012, Credit Suisse made the announcement that TVIX new unit creation was suspended.
- Four weeks after the suspension, TVIX was trading at a 90% premium vs its indicative value.
- At the end of March, Credit Suisse started issuing new units again. TVIX immediately returned to its indicative value.
- In July 2020, Credit Suisse decided to delist TVIX from national exchanges
- TVIX had become extremely popular during and after the pandemic bear market. When its volume had become uncomfortably large, Credit Suisse decided to discontinue this ETN.
- The remaining units have been trading in the Over-The-Counter market since then. First at no premium, later at up to 160% vs indicative value.
The most notorious example of new-unit suspensions, however, is DGAZ. This 3x Inverse Natural Gas ETN spiked from $400 to $24,000 within a few days in August 2020.
As most readers will suspect correctly, Deutsche Bank also stopped the creation of new units for some commodity ETNs in 2011 and 2012.
Why did Barclays decide to suspend VXX?
The press release does not provide any rationale for the decision to suspend VXX. It does mention, though, what did not trigger this decision.
These actions are not the result of the crisis in Ukraine or any issue with the market dynamics in the underlying index components
Barclays Press Release March 14, 2022
Without speculating too much, potential reasons include:
- Position size limits imposed by exchanges (CBOE has size restrictions for VIX futures)
- Hedging costs or hedging size limitations
- Risk management constraints
When will Barclays restore the issuance of new VXX units?
The press release explicitly states that Barclays intends to restore the creation of new units. It does not say when.
As we do not know why Barclays decided to suspend new-unit creation for VXX, it is tough to speculate when this is going to happen.
However, when it happens, expect VXX to closely track its indicative value within minutes or even seconds.
How to protect against VXX shenanigans
Here are a few recommendations:
- Get the indicative value before doing anything. Yahoo Finance provides the indicative value (instead of “VXX” type “^VXX-IV” into the quote search box).
- Be prepared for huge volatility – both up and down. If you want to trade VXX now, make sure it is a small position.
- Don’t be surprised by announcements after hours. For example, the suspension could be cancelled before the market opens.
- Avoid trading VXX completely by choosing VIXY (1x leveraged ETF) or UVXY (1.5x leveraged ETF). VIXY options are quite illiquid but this can change quickly with the uncertain VXX situation.
- Be careful shorting VXX. Nobody knows if and when the creation of new units is restored. If you want to gamble, be aware of the risk of shorting the ETN directly (read about DGAZ) and explore a defined-risk option trade instead!
Keeping all fingers crossed that VXX will be revived. Let’s hope it won’t follow the ever-growing list of delisted large volatility ETFs and ETNs (see at the bottom of this article).
Update – March 23, 2022
Seven working days later, the creation of new units is still suspended, ruling out some explanations for the announcement made by Barclays on March 14:
- This is not an “administrative” issue where someone missed a deadline to file some paperwork.
- The announcement was not caused because Barclays staff or counterparty staff were on sick leave due to COVID-19 and could not update/finalize swap agreements.
Not sure what the future holds for VXX, but it looks as if Barclays is not interested in a quick fix to the issue.
The longer Barclays waits, the more eroded trust in VXX will be.
Recent quotes show that market participants are losing trust. The premium to net-asset value has been going up every day since the announcement.
Source: https://ycharts.com/companies/VXX/discount_or_premium_to_nav
Update – March 28, 2022
Today, the financial press (Reuters, WSJ) reported that Barclays had issued volatility and oil exchange-traded notes widely beyond regulatory permission. Apparently, Barclays was authorized to issue $21 billion but actually sold securities worth $36 billion, starting back in 2019.
At the same time, Barclays announced an estimated cost of roughly $600 million from SEC fines.
The award for best comment goes to the analysts at Shore Capital who described the situation as Barclays “tripping over its shoelaces”.
According to the Barclays press release, Barclays “remains committed to its structured products business in the United States.” This statement most likely means that VXX and OIL will be operating normally in the near future.
However, immediately after the market open, traders started pushing up the price of VXX. At one point, the premium vs indicative value was above 40%.
Update – April 28, 2022
It’s been one and a half months, and creation of new VXX units is still suspended.
Today, Barclays released a press statement providing an update. Barclays wants to restate its latest annual report with the SEC. There is no timeline commitment in the press release.
The premium vs indicative value has come down recently. Currently, VXX is trading at a 15% premium.
Update – May 23, 2022
Wow – is the VXX saga coming to an end?
Today, Barclays released another press statement. In a nutshell, Barclays has filed a Form 20 F/A with the SEC to address the issues related to the over-issuance of financial instruments such as VXX.
While the press statement is specific about the start of a GBP 1 billion share repurchase program, there is no specific date for restarting issuances of VXX.
Today, traders are anticipating a permanent fix to VXX, as the % premium vs indicative value is in the low single digits.
Let’s keep our fingers crossed for a quick follow-up announcement from Barclays!
Update – July 20, 2022
Still no final resolution!
Even though the Form 20 F/A had been filed with the SEC three months ago, there is still no restart of the VXX issuance.
The premium vs indicative value has been hovering around 2-4% for the last three months.
Not surprisingly, competitive offerings, such as VIXY (1x leverage), UVXY (1.5x leverage) and the recently launched UVIX (2x leverage) have made some inroads into VXX trading volume and options open interest. UVXY open interest is now significantly higher than that of VXX.
Conclusion: Barclays needs to hurry up and restart issuances, as market participants are open to switching to alternative volatility products.
The Long-Awaited Announcement – September 19, 2022
Today, Barclays announced that the issuance of VXX (and some other ETNs) will start again next Monday, September 26, 2022.
Important to note, the premium vs indicative value dropped to almost zero immediately after this announcement.
VXX Is Back To Normal – September 26, 2022
As announced on September 19, the issuance of new VXX units started today.
The next weeks and months will show how VXX has changed due to its 6-month “sabbatical”. A few observations:
- Trading volume is significantly below where it was six months ago. A lot of traders started trading VIXY and UVXY, and it is doubtful if they will come back.
- Options volume is also significantly down, and spreads are bigger. VXX used to be the volatility ETN/ETF with the most liquid options. Now, UVXY is the favorite of the options crowd.
SEC Fines Barclay – September 29, 2022
Barclays agreed to pay total penalties of roughly $360 million – not only for VXX, but also other securities affected.
Needless to say that the SEC press release harps on the importance of “robust internal controls” over offers and sales of securities.