The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is a popular Exchanged-Traded Product from Barclay’s designed to track short-term changes in the CBOE volatility index, also known as the VIX.
Barclays announced on March 14th, 2022 that it would halt the sale and issuance of VXX. The bank cited internal errors that caused it to issue more shares than had been registered. As a result, Barclays was restricted from issuing VXX.
While many were left to question how a global institution could make this mistake, savvy traders saw an opportunity to capitalize.
Market dynamics soon took effect. Increased uncertainty caused a dislocation between the traded price of VXX and the value of the VIX Index. The fund premium of VXX – which measures tracking error– inflated to 30%.
Short sellers stepped in to capture an arbitrage opportunity. Traders expected the elevated premium (reflected in VXX’s share price) to collapse once markets returned to equilibrium. Short stock utilization in VXX moved from the mid-70% in March to 100%, where it remained until issuance re-started. Borrow fees increased to reflect heightened interest from speculators. Fee rates on VXX have historically hovered around 3%. At the peak of this move, the annualized rate was 33%.
In the 90 days preceding the halt, Average Daily Volume in VXX was 70M shares. After the announcement, that figure dwindled to 6.5M shares per day.
A popular trade for the arbitrage was to position short VXX shares and go long VIX futures. The short VXX leg would profit from premium collapse, while the futures served to hedge against a spike in volatility.
Clients were able to put on both legs at their preferred ratio using the tools in IBKR’s Trader Workstation. Depending on trade entry timing, generally market participants saw things shake out to their benefit. The VXX premium collapse in September coincided with an upward move in the VIX Index.
The IBKR Securities Lending Desk had demand in this name from both retail traders and institutions over the past several months. Barclays resumed creations on September 26th, which removed the opportunity for arbitrage. Traders using IBKR’s sophisticated technology and deep stock loan availability are waiting to see what the market has in store for them next.
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