The avalanche of volatility pouring down on investors took another victim Tuesday with the liquidation of a newfangled security at the center of the storm. It remains to be seen if the move will stabilize markets that have already seen $3 trillion of value erased.
While U.S. equities calmed somewhat, questions remain over how a security that quickly became a favorite of investors could enact enough stress in the market’s plumbing that it shook stock markets from New York to Tokyo.
The catalyst has been unprecedented moves in the Cboe Volatility Index that have roiled the market for exchange-traded products tied to the fear gauge. Credit Suisse AG said a spike in VIX futures will force it to liquidate an ETP that moves in the opposite direction, effectively wiping out a fund whose market value topped $2 billion three weeks ago.
More than a dozen other funds triggered limit up/limit down rules that halted trading as of 10 a.m. in New York. Among the suspensions was a ProShares inverse ETP, which sank more than 80 percent after hours Monday. Horizons ETFs Management Canada Inc. suspended redemptions of its ETF that bets against VIX futures.
The VIX swung wildly Tuesday, tumbling as much as 40 percent before trading flat around 36. It more than doubled on Monday in its biggest-ever runup and topped 50 earlier Tuesday.
Betting against volatility has become a popular money-making strategy in the years since the financial crisis, with banks and other financial companies offering a plethora of ‘short-vol’ products. But exchange-traded notes and funds that give investors a quick and easy way of entering the trade have also been criticized for their risks. BlackRock Inc. has been calling for regulation that would clearly spell out the dangers associated with such inverse and leveraged exchange-traded products.
Credit Suisse Group AG is buying back the VelocityShares Daily Inverse VIX Short-Term ETN, which it issued and is known by its trading symbol XIV. The ProShares Short VIX Short-Term Futures ETF is meanwhile expected to open for business on Tuesday, ProShares Advisors, which manages the fund, said in a statement.
The bank has not suffered any trading losses related to the exchanged-traded note, the company said in an earlier statement Tuesday. The Swiss lender was the biggest holder on the note with 32 percent at the end of the third quarter. The ETN had a market value of about $2.2 billion at its record high on Jan. 11.
The surge in volatility had already claimed one victim: Nomura Europe Finance announced the early redemption of its Next Notes S&P 500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN, which had 32.4 billion yen ($297 million) in assets.
Credit Suisse shares fell as much as 8.5 percent in Tuesday’s trading in Zurich and were 4.3 percent lower as of 2:26 p.m.
