Trade Halt in VIX ETFs
On February 5, 2018, extreme activity in the Volatility Index (VIX) lead to hundreds of millions of dollars in investor losses. The following day, after having lost greater than 80% of their value, three U.S.-listed inverse VIX Exchange-traded funds (ETFs) were halted from trading and a short sell restriction was placed on them. The ETFs in question were:
VelocityShares Inverse VIX Short-Term ETN XIV.P
ProShares Short VIX Short-Term Futures ETF (SVXY.K)
VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV.O)
VIX ETFs Bet Against Market Volatility
Described by one industry expert as a “derivative of a derivative of a derivative,” some of the most popular ETFs bet against volatility within a market index, most often the S&P 500 or Dow Jones Industrial Average. In other words, they bet on a calm market. And since many of the VIX products were created after the Great Recession, they have bet correctly for the past several years, making great returns for investors. In turn, they became increasingly popular, expanding beyond the institutional and professional investors they were designed for to retail traders.
However, when market volatility shot upward on February 5, these products naturally cratered.
Long-term Value of XIV ETFs Equals Zero
On February 6, Credit Suisse declared an “Acceleration Event” and announced that it was calling its VelocityShares Daily Inverse VIX Short-Term ETN (XIV). The XIV ETFs, which opened the week with $1.9 billion in assets, would be shut down after having plummeted 94%, all in one day of trading. Holders of the XIV ETNs saw the February 5, 2018 closing value of $99 collapse to $4.22 in after-hours trading alone.
Credit Suisse has also publicly remarked that the long-term value of these products is zero. This in part due to the fact the XIV ETFs are intended for short-term trading only.
Regulators Investigate & A Whistleblower Cries Foul
The following week, the Financial Industry Regulatory Authority (FINRA) announced that it was investigating traders who had placed bets on S&P 500 options to influence prices for VIX futures.
In a separate action, an anonymous whistleblower claimed to have very specific knowledge regarding a manipulation scheme. A letter sent to the SEC and other regulators by the law firm representing the whistleblower states that they believe that “the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index.”
Green & Schafle Opens Investigation
According to the above information, our securities litigation team has opened an investigation into XIV ETFs. There are two potential causes of action arising from the crash of these products:
Market manipulation and fraud
Breach of fiduciary duty/unsuitable investments
Market manipulation may arise if the claims of the whistleblower come to be true.
However, retail investors who purchased the leveraged inverse ETFs without those products being suitable for them may have legal recourse against their broker-dealers.