Amidst all of the market turmoil following the Reddit wallstreetbets efforts to put a massive short squeeze on the likes of GME, AMC, BBY, EXPR, KOSS, BB, etc., it was just a matter of time before this same short squeeze template was applied to ETPs. On January 28^th, silver became a short squeeze target and the primary silver ETP, SLV, was suddenly in the crosshairs and trading volume spiked about 10x.

On Monday, the OTC remnant of the venerable TVIX ETN, delisted by Credit Suisse on July 12, 2020, and now trading under the TVIXF ticker, became the target of yet another copycat short squeeze effort.

Yesterday, Yacob Peterseil of Bloomberg summarized the developments in the TVIXF short squeeze attempt in the aptly titled, A Onetime Giant of Volatility Has Gone Haywire in OTC Trading. Peterseil noted that only 7% of TVIXF’s outstanding shares have been sold short, which dramatically limits the potential success for a short squeeze. In the article, I am quoted as not being surprised that an attempt was made to squeeze the TVIXF shorts given the success of previous short squeeze efforts, but I also note that an effort to squeeze the shorts is very risky for longs in that the last time there was a similar undertaking, Credit Suisse declared an acceleration event and crushed the longs. It is the risk of an acceleration event that forces the price to the indicative value (IV) – a feature that is unique to ETPs and does not apply to single stocks – that makes shorting ETPs much riskier.

The historical reference above is to DGAZF, which went from about 400 to about 25,000 in one week during a short squeeze in August 2020 when the indicative value was near 200. The decoupling of the market price on the OTC from indicative value was in large part due to the cessation of the ability to generate new creation units and thus the ability to use shorts to arbitrage any difference between the market price and indicative value. With large losses incurred by investors and the associated bad publicity, Credit Suisse elected to accelerate DGAZF. As noted above, the acceleration of the note was executed at the indicative value price, not the market price: “As described in the Pricing Supplement, investors will receive a cash payment per ETN equal to the arithmetic average of the closing indicative values of the ETNs during the accelerated valuation period”. As a result of the acceleration to the indicative value, investors who saw DGAZF trade at 125x its indicative value were exposed to a 99.2% loss.

Not surprisingly, the TVIX prospectus and pricing supplement has essentially the same language regarding acceleration at indicative value as DGAZ, with the pricing supplement noting no less than a dozen times that in an acceleration event, the redemption price reverts to indicative value rather than the market price. 

If some of this talk of short squeezes, premium to indicative value, and suspension of creation units sounds familiar, this is not the first time it has happened to TVIX. I covered the initial instance of the suspension of creation units in TVIX at length back in 2012, when most investors were still not familiar with the intricacies of indicative value, creation units, the potential for short squeezes, and the potential for market prices to decouple dramatically from indicative value.

In the graphic below, I show the recent uncoupling of TVIXF from TVIX.IV (TVIX’s indicative value) and the premium that has developed as a result of the short squeeze peaking at 44% on Monday and falling back to 29% as of today. The key takeaway for longs is that at any point in time, Credit Suisse can do as they did with DGAZF and declare an accelerating event, forcing the distorted OTC market price back down to indicative value in a hurry.

(Click on image to enlarge)

[source(s):  Yahoo, VIX and More]