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VXX goes haywire - What happened

For those trading VXX, you would notice an anomaly on 15 March 2022. In fact, it started a day earlier on 14 March 2022, albeit to a lesser extent. VXX is an ETN that tracks the VIX index using a basket of front and second-month VIX futures contracts. It is not perfect and they don't always move in sync all the time. But normally, we don't usually expect huge deviations. But on 15 March, VXX surged as high as 44.6% from its previous close.

VXX surge 44.6% at the highest point
VXX surged 44.6% at the highest point on 15 March 2022

Now VXX is known to be highly volatile. And it has also moved more than that in a single day before. But what makes the move on 15 March special is that it is trading in the opposite direction it should. VXX tends to move inversely with the stock market. On a day where the stock market trends up strongly such as 15 March, we expect it to move down. Even though VXX eventually closed down -0.38% for the day, its huge up move intraday of +44.6% is way out of the norms. In comparison, VIXY (an ETF that also tracks the VIX) is down -3.3% on the same day. In fact, the deviation started a day earlier. On 14 March 2022, VXX closed up 9.4% while VIXY is only up 3.2%.

What caused this abnormal behavior?

This behavior is the result of VXX's issuer Barclays Plc suspending the issuance of new VXX shares. Now, the price of VXX can trade at a premium or a discount against its indicative price. When it is trading at a premium, the issuer can create new shares to absorb buying demand to bring the price down. Similarly, if it trades at a discount, the issuer can redeem the shares to send the price up. So as you can see, things turn lopsided when issuers are unable to issue new shares.

Barclays Plc claimed they lacked "sufficient issuance capacity". But another public post said VXX is capable of issuing up to $8.16 billion, and as of last Friday, VXX hasn't even hit a billion. So that might not be the real reason. Perhaps Barclays just wants to lower the risk of these products carried on their books. Or maybe they are nearing regulatory limits on their short-term liabilities. VXX is after all still debt on the bank's book.

So when Barclays made the announcement on 14 March, it likely precipitated a short squeeze as those who shorted VXX rushed to buy back VXX shares to cover their positions. This sent the price of VXX soaring after the market opened on 15 March with multiple trading halts within an hour. And even though the price came back down at market close, VXX is still trading at a significant premium to its indicative price. As of 15 March, VXX closed at $28.7 and its indicative value is $26.35. This means VXX is priced 9% above its indicative value.

VXX Indicative Value
VXX Indicative Value on 15 March 2022

Then what is next?

In any case, this is not the first time an issuer pulled the same stunt. Credit Suisse did it with TVIX, a leveraged VIX ETN, in 2012.

But for now, it is best to avoid using VXX to express your views on volatility. Because until Barclays restarts issuing shares on VXX, it will not behave in the way you expect it to be. Some may be tempted to buy thinking the premium will go higher as long as the issuance is not resumed. But you have no idea when Barclays will start issuing VXX shares again. When that occurs, you can expect VXX to come crashing down fast and furious. Or perhaps you are looking to short instead to capture the inflated premiums now. But premiums can continue to rise. TVIX's premium over its indicative value reached 90% after Credit Suisse suspended its issuance for a month.

As an alternative to VXX, you can consider using VIXY in the meantime.

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