FT Alphaville " Gunfight at the T.V.I.X. Corral There's been a lot of talk about the carnage in the TVIX on Thursday. The VelocityShares 2x short-term ETN, whose creations were suspended by Credit Suisse on February 21 due to "internal limits," fell 29 per cent. Curiously, the slide came just before an announcement from the provider that some level of creation would be reinstated. Understandably, the idea that the re-opening was leaked ahead of time is now doing the rounds. After all, why would the ETN, which had been trading at an 80 per cent premium to NAV, suddenly converge with its indicative value for any other reason? In fact, the whole thing has turned into a big mess. Some say those Muppet enough to have gone long the TVIX after its creations were suspended probably deserved to be wiped out. It was, after all, the equivalent of playing with fire. More to the point, it was obvious that eventually the TVIX would have to reconverge with the NAV: We can't help but agree. What's more, it's clearly obvious that people were positioning for exactly such a move if you look at the short interest in the units: But all this is really about two issues. The first is about the soundness of the structure, and its suitability for a listing on a public exchange. How can a product that has the ability to flip willy-nilly from open-ended to closed-ended status at the total discretion of the issuer ever be considered an acceptable public investment vehicle? What's more, even now, Credit Suisse commands a unique position of control over the outstanding supply of units in the market. These no longer behave as they might have been expected had the creation and redemption mechanism not been stalled. In fact, the best analogy is to consider Credit Suisse the central bank monopoly supplier of units - in a position where it's just decided on easy policy but the market knows it can intervene again at any moment. Unlike the central bank, however, Credit Suisse has signalled squat publicly to the market about its intended action. But there's more curiosity still. And this is what's much more concerning. It's the games that are being played in the background. Note the press release issued Thursday night: As disclosed in the pricing supplement relating to the ETNs under the heading "Risk Factors - The Market Price of Your ETNs May Be Influenced By Many Unpredictable Factors," the market value of the ETNs may be influenced by, among other things, the levels of supply and demand for the ETNs. It is possible that the reopening of the ETNs on a limited basis, as described above, may influence the market value of the ETNs. Credit Suisse cannot predict with certainty what impact, if any, the reopening described above will have on the public trading price of the ETNs. It is possible that the resumption of new issuances of the ETNs, even on a limited basis, could reduce or remove any premium in the trading price of the ETNs over their indicative value. Investors are cautioned that paying a premium purchase price over the indicative value of the ETNs could lead to significant losses in the event the investor sells such ETNs at a time when the premium is no longer present in the market place or the ETNs are accelerated (including at our option), in which case investors will receive a cash payment an amount equal to the closing indicative value on the accelerated valuation date. What this sounds like to us is some sort of standoff between Credit Suisse and the Authorized Market-makers who market-make the ETN. It's almost like Credit Suisse is including conditionality into the creations because it's had a bad experience with these entities. What's more, the nature of the hedges is intriguing. As we've pointed out before, Credit Suisse has no obligation to hedge this ETN with Vix futures outright. It can (and probably has been) using a multitude of different instruments - including, if not exclusively, its own internal net volatility position. The fact it is now going to create units that will be aimed solely for market makers -and presumably not resold to the secondary market - suggests it's trying to tie their hands somehow. What's more, the press release states that Credit Suisse is demanding that the creations are linked to market makers selling the company suitable Vix hedges, including swaps, at the same time. One might conclude that market makers ramped up the creations leading up to February 21 on purpose so as to specifically breach Credit Suisse "internal limits," since they had an insight about how much of an internal volatility hedge it carried. Once the limits were breached, Credit Suisse would have to be forced into the open Vix futures and swap market to do its hedging - undoubtedly known to the market as extremely short Vix futures. So were those in the know trying to take advantage, and is this a Credit Suisse counter-move to regain the advantage? But it would be worth asking who the TVIX Authorized Market-makers are. Here, in any case, are the top holders of the TVIX (usually a clue) via Bloomberg: 1) Susquehanna 2) Virtu Financial 3) Oxford Asset Management 4) Institute for Wealth Management 5) Longview Capital 6) Jane Street Holdings 7) Forward Management Knight Capital 9) Flow Traders 10) Millennium Management It's also worth pointing out that Vix options expired on Wednesday, the day before the plunge. All in all, this could certainly get interesting. This entry was posted by Izabella Kaminska on Friday, March 23rd, 2012 at 17:26 and is filed under Capital markets, Commodities. Tagged with credit suisse, TVIX, velocityshares, vix, volatility.