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Summary

On February 5, 2018, the VIX — which had closed Friday February 2 around 17.3 — spiked intraday to roughly 50.3 and closed at about 37.3, a rise of ~116%, the largest single-day percentage rise on record. XIV — the VelocityShares Daily Inverse VIX Short-Term ETN, a ~$2 billion levered short-volatility vehicle — broke its acceleration condition intraday on February 5 (indicative value ≤ 20% of the prior close). Credit Suisse announced the event acceleration on February 6 via an SEC-filed notice; XIV's last trading day was February 20, with acceleration/settlement expected February 21. XIV itself closed February 6 down ~93% (~$4.22).123

Timeline

Time (ET) Event
Fri Feb 2, 2018 Payroll beat; S&P drops ~2.5%; VIX jumps ~40% — short-vol positions already stressed
Mon Feb 5, morning Equities open lower; VIX futures surge
~3:30–4:10 pm VIX spikes intraday to ~50.3; closes ~37.3 (up ~116%, the largest single-day rise on record)
~4:10 pm XIV intraday indicative value down ~96%; short-term VIX futures spike as inverse ETPs must rebalance
Feb 5, after close XIV's intraday acceleration condition triggers (indicative value ≤ 20% of prior day close)
Feb 6 Credit Suisse issues the SEC-filed acceleration notice; XIV closes down ~93% (~$4.22)
Feb 6–20 XIV continues trading through its last day (Feb 20) at sharply reduced levels
Feb 21 Acceleration/settlement date (expected per the notice); delisting follows; short-vol complex (SVXY, etc.) restructures

Mechanics

  • Daily-reset inverse product: XIV targeted −1× the daily return of short-term VIX futures. A doubling of the index requires the note to short more futures into a rising market at the next reset — buying high to maintain the inverse ratio.
  • Feedback loop: the rebalancing flow of XIV + related inverse/levered VIX ETPs was large relative to VIX futures liquidity; forced buying amplified the futures spike, which amplified the ETP losses — a classic procyclical deleveraging spiral.
  • Termination condition: the ETN's prospectus allowed acceleration announced Feb 6 (SEC-filed notice); last trading day Feb 20; acceleration/settlement Feb 21; XIV closed Feb 6 down ~93% (~$4.22)

Who Got Hurt and Why

Group Loss mechanism
acceleration announced Feb 6 (SEC-filed notice); last trading day Feb 20; acceleration/settlement Feb 21; XIV closed Feb 6 down ~93% (~$4.22)
Short-vol option sellers Margin calls as VIX futures spiked; some platforms repriced illiquid options mark-to-model
Brokers/clearing Client failures on naked short VIX futures and ETP shorts; short-squeeze on XIV borrow
Counterparties of the flow Market makers who pre-hedged profited, but liquidity provision was abruptly withdrawn mid-spike

The common failure: treating a daily-reset levered ETP as a stable "short vol index" position, and sizing short-vol exposure without acknowledging that its own unwind was the tail scenario (see Tail Risk Principles).

Lessons

  1. Know the flows inside your short: short-vol sellers were effectively short their own buyers' forced hedging; instrument-level mechanics matter more than the strategy label.
  2. Intraday acceleration ≠ daily VaR: a 99% daily VaR framework has no bucket for a 96% loss in 90 minutes; stress tests must include intraday rebalancing spirals (see VaR and Margin).
  3. Defined risk and structure: TOMIC-style sizing (2% rule, defined-risk structures, units sleeve) would have capped any single-account loss, but accounts running naked short VIX futures or levered inverse ETPs had no cap.[^tomic-risk]
  4. Hedge assumptions break in the event: discrete/intraday hedging failed as VIX option and futures liquidity thinned exactly when needed — the Natenberg gap problem at ETP scale.[^natenberg-hedge]
  5. Regime dependency: low-vol regimes incubate levered short-vol carry; the unwind itself creates the high-vol regime (see Regime-Dependent Delta Exposure and VIX ETP Flows).

Source Notes

  • Cboe Global Markets, press release regarding VelocityShares XIV and termination/replacement (February 5, 2018), cboe.com.
  • Credit Suisse AG, VelocityShares Daily Inverse VIX Short-Term ETN prospectus and accelerated-termination notice (February 2018).
  • Whaley, R. E., "Understanding the VIX," Journal of Portfolio Management, 35(3), 2009 — VIX construction and mechanics.
  • Cheng, M. & Madhavan, A., "The Dynamics of Leveraged and Inverse Exchange-Traded Funds," Journal of Investment Management (JOIM), 7(4), 2009 — daily-reset rebalancing flows of levered/inverse ETPs.
  • Eraker, B. & Wu, Y., "Explaining the Negative VIX Risk Premium: The Role of Levered ETFs" (SSRN working paper) — ETP hedging flows and VIX dynamics around 2017–2018.

Links

References

  • Credit Suisse AG — XIV Event Acceleration notice (SEC EDGAR, 2018-02-06): https://www.sec.gov/Archives/edgar/data/1053092/000095010318001572/dp86358_ex9901.htm
  • CNBC — XIV last trading day Feb 20; closed down ~93% Feb 6: https://www.cnbc.com/2018/02/06/the-obscure-volatility-security-thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-plunge.html
  • Reuters — Credit Suisse volatility fund liquidated (2018-02-06): https://www.reuters.com/article/business/credit-suisse-volatility-fund-liquidated-after-market-selloff-idUSKBN1FQ255/
  • TOMIC — Risk Management topic: ../../option-traders-hedge-fund-bundle/topics/risk-management.md
  • Natenberg — Hedging with Options topic: ../../option-volatility-and-pricing-bundle/topics/hedging.md

  1. Credit Suisse AG, XIV Event Acceleration notice, SEC EDGAR, 2018-02-06 ↩

  2. CNBC, 2018-02-06 ↩

  3. Reuters, 2018-02-06 ↩