A branch of Barclays Bank is seen in London, Britain, on February 23, 2022. REUTERS/Peter Nicholls
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LONDON/NEW YORK, March 14 (Reuters) – Britain’s Barclays (BARC.L) announced Monday that it has completed the sale and issuance of two exchange-traded notes (ETNs) with total assets of about $1 billion — one linked to crude oil and another to a measure of market volatility — due to capacity constraints, in a move some investors said could trigger large price swings in the products.
ETNs are debt instruments that banks issue with a promise to pay their holders a return linked to the performance of the underlying security or benchmark. Investors have been particularly sensitive to the product since another volatility-tracking ETN, called XIV, went bust in a matter of days in February 2018, leaving shareholders close to $2 billion in losses.
The affected ETNs are iPath® Pure Beta Crude Oil ETN and iPath Series B S&P 500 VIX Short-Term Futures ETN.
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Barclays, which expects to resume selling and issuance of the ETNs once it can accommodate additional capacity, said the measures were not related to the Ukraine crisis or an issue with the market dynamics of the underlying index components. The bank does not have sufficient capacity to support further sales from inventory and further issuance of the ETNs, it said in a statement.
Barclays declined to elaborate on the rationale behind the measures, which took effect from Monday’s open for trading.
“My first reaction is that Barclays is probably trying to de-risk,” said Brent Kochuba, founder of analytics service SpotGamma, noting a recent spike in trading volume in VXX.
About 71 million VXX shares changed hands every day last month, about double the average daily volume last year, as investors bet on stock market volatility as the Russia-Ukraine crisis rocked global financial markets.
Matt Thompson, managing partner at Chicago-based investment advisor Thompson Capital Management, which specializes in volatility trading, said Barclays’ move may have been prompted by a lack of liquidity in the market.
Analysts warned that the suspension of the share creation process for the two ETNs could cause their trading price to deviate from their indicative price — where they should trade based on the value of their underlying securities.
Typically, large banks buy and sell stocks to generally keep the trading price of ETNs at their indicative value. But with the suspension of new shares, this process can break.
“The trading price of these securities may ‘increase’ above the target price without effective restrictions,” said Vance Harwood, who runs alternative investment website Six Figure Investing and is a consultant specializing in volatility-linked products.
VXX ended the day up 9.4% at $28.81, or $1.58 above its target price, the widest of this gap in more than a year.
But that could collapse quickly, analysts have warned.
For example, shares of the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) plunged nearly 60% over the course of four trading sessions in March 2021 after the ETN’s issuer, Credit Suisse, resumed issuance of TVIX shares after a month-long suspension had recorded .
SHORT SQUEEZE CANDIDATE
For VXX — a heavily shorted instrument that has had about 90% of its shares shorted — the freeze on stock creation makes it a prime candidate for a potential short squeeze, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
Short sellers sell borrowed shares to make a profit by buying back the shares at a later date at a lower price. A short squeeze occurs when short sellers cannot find stocks to buy to close their bearish bets, even if the stock price is rising.
According to S3 data, VXX shorts are down about $198 million year-to-date.
“VXX shorts are already teetering…the lack of supply could really push them over the edge,” Dusaniwsky said.
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Reporting by Iain Withers in London and Saqib Iqbal Ahmed in New York Editing by Megan Davies, Barbara Lewis and Matthew Lewis
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