With the distorted price, most people with a short position could be expected to face margin calls, Harwood said.
A trader who borrowed the note and sold it for around $500 a few weeks ago -- the first step in a short sale -- faced the daunting obligation of buying it back for more $10,000 in order to return shares to the lender. Brokers whose clients are caught in such a bind often demand more money to cover the swelling debt.
DGAZF was a popular short thanks to the tendency of geared notes to steadily decline in value over time, and some 140,000 shares were shorted as of July 31, according to exchange-reported data compiled by Bloomberg.
But it’s a high-risk business -- in a three-times leveraged note like DGAZF, a massive price jump could trigger a huge margin call for even a small short trade.
“The $80 million who were short in DGAZF at end of July could have owed something like $2 billion,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence.
By liquidating the fund, Credit Suisse has effectively “rescued” the shorts, Harwood tweeted after the announcement.
This article was provided by Bloomberg News.