Meet the New VXX, Same as the Old VXX

November 9, 2010

According to the website at

The S&P 500 VIX Short-Term Futures™ Index TR is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. Specifically, the S&P 500 VIX Short-Term Futures™ Index TR offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500® Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

A direct investment in VIX (commonly referred to as spot VIX) is not possible. The S&P 500 VIX Short-Term Futures™ Index TR holds VIX futures contracts, which could involve roll costs and exhibit different risk and return characteristics. Investments offering volatility exposure can have various uses within a portfolio including hedging, directional, or arbitrage strategies and are typically short or medium-term in nature.

On October 26, 2010, Barclays announced that it intended to implement a 1 for 4 reverse split of the iPath® S&P 500 VIX Short-Term Futures™ ETN, with such reverse split to take effect on November 9, 2010. The press release announcing the reverse split is available here.

For active retail and professional traders, the VXX is a portfolio management tool that allows the ability to address market volatility.  Although market commentators have frequently criticized the often imperfect tracking of the underlying VIX by the VXX, nonetheless, the VXX was recently attracting some 7 million shares per day of volume (adjusted for the 1:4 split) and was a popular arrow in many trader's quiver.

Alas, it does not appear that the 1:4 conversion has gone off particularly well today

Many investors went to sleep last night owning X shares of VXX, only to awake to a nightmarish scenario.  There online accounts reflect that their X shares of VXX are still X shares of VXX (old).  However, many online accounts have disabled the VXX (old)  position and will not respond to online clicks to activate a trading screen.  Moreover, yesterday the VXX (old) traded in the $11s but today, the VXX (new) is priced this morning in the $44s. Some reports indicate that investors' online portfolios have not been updated to reflect the conversion and that they are essentially "frozen" as of yesterday's close (as the overall portfolio would reference the VXX (new)). Consequently, today's VXX move -- up or down -- may not be updated on a real-time basis in an investor's online portfolio and the VXX (old) shares have been frozen as of yesterday's close.

In addition to that portfolio pricing issue, some investors are flummoxed as to how to sell their VXX (old) position. Apparently, the advice provided today by brokerage firms runs the gamut from shorting the VXX (new) and then delivering the converted VXX (old) shares when that adjustment finally occurs at the brokerage firm; or, to selling VXX (new) and create a synthetic short as against the VXX (old) shares that will be converted.

On top of all the aforementioned, there is the problem of gaining confirmation as to whether you are long 20,000 VXX (old) or 5,000 VXX (new) -- and whether you should attempt to sell/short 20,000 or 5,000 shares.  Some customers are experiencing delays in reaching a customer service representative concerning the VXX conversion.

A number of online brokerage firms are reporting heavy call volume on this VXX conversion issue and numerous public customers have expressed upset with their inability to obtain comprehensive answers to their questions.  It is likely that there may be an influx of litigation concerning this issue if the VXX regains some of its lost volatility and customers misunderstand their brokerage firm's instructions.  Stay tuned!


The so-called advance-fee scam is becoming a common rip-off scheme.

Where did all those millions go? Dodakian and Wu spent hundreds of thousands of dollars of the proceeds from their criminal acts on personal purchases. Specifically, Dodakian used victims' money for mortgage and college tuition payments, and Wu bought luxury goods and diamond jewelry worth $17,000. In addition, Dodakian withdrew over $600,000 of victims' money in cash, and Wu withdrew nearly $200,000.

As a result of the fraudulent schemes perpetrated by Dodakian and Wu some victims lost their life savings and their homes, and two victims were unable to afford healthcare expenses related to chronic illnesses. This idiocy is far more than a financial crime. This is a human tragedy.