A $905 million exchange-traded note betting on stock volatility endured a roller-coaster session on heavy volumes 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. The note later reversed gains to close lower in the wild session.
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 closed 0.38% lower, a gauge of the indicative value of the ETN fell 3%.
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 a 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.”