Calling Out the SEC

The Securities and Exchange Commission keeps rejecting a Bitcoin ETF, supposedly because the agency has a mission to protect investors, which has it worried about custody, liquidity and price manipulation.

Rebutting their concerns is easy — multiple companies have custodied billions in BTC for years, it’s a fast fungible asset that trades at dozens of exchanges around the world, and so on. But today, I want to address the idea that the SEC cares about investor protection in the first place, by looking at some of the products the agency has approved.

There are commodity ETFs whose exposure to the futures curve leads to severe tracking error. There are leveraged ETFs whose path dependance slowly grinds them to worthless. There are daily ETFs that serve no apparent economic purpose other than enabling pros to pick off retail punters (nobody has an economic need to be 3x leveraged long robotics stocks just for one day.) One could even fill up an entire blog post with the ridiculous things written in the prospectus of these products (“There is no guarantee the fund will meet its stated investment objective,” says the robot one.)

But nothing drives home the point that the SEC doesn’t care about investor protection more than those demonic, dangerous, destabilizing and — pardon my vulgarity — dogshit products known as volatility ETFs, like the XIV.

If that symbol sounds familiar, it’s because the SEC-approved VelocityShares Daily Inverse VIX Short Term ETN blew up almost a year ago, vaporizing 80% of its value in a single day and leading to total liquidation. There was shock and horror, and stories of the people who the SEC is supposed to protect losing millions. There were trading irregularities too, like this gem:

People who bought XIV in the last hour of trading on Monday lost more than 90 percent of their money within 24 hours, even though they were basically right, or at least not grievously wrong, about the short-term direction of the VIX

But the real tragedy here is the fact that such a product was allowed to exist in the first place, because to dive down into what it actually was and how it supposedly worked is to get tangled up in such complex and confusing financial minutiae that I’m willing to bet a bitcoin the current Chairman of the SEC could never comprehend them. And just to prove, once and for all, that the Commission doesn’t prioritize investor protection, I’m going to ask and answer a simple question: WTF was XIV?

According to the fact sheet:

The VelocityShares Daily Inverse VIX Short-Term ETNs (the “ETNs”) are senior, unsecured obligations of Credit Suisse AG

WTF was XIV? A loan

An unsecured loan to Credit Suisse, to be exact. But not a normal loan, as the point of the money was to:

The return on the ETNs is linked to the inverse of the daily performance of the S&P 500 VIX Short-Term Futures™ Index

WTF was XIV? A loan for trading to achieve the opposite of the daily moves of an index

Unfortunately for the folks at CS, the “S&P 500 VIX Short Term Futures Index” is not a traded product that you could short, but rather a made up number. So say its creators:

The S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts

WTF was XIV? A loan for trading to achieve the opposite of the daily moves of an index of an average of the price of multiple futures contracts.

This brings us to VIX futures. Unlike normal futures, which are simply a promise to buy or sell an asset in the future, VIX futures:

.. reflect the market’s estimate of the value of the VIX Index on various expiration dates in the future

WTF was XIV? A loan for trading to achieve the opposite of the daily moves of an index of an average of the price of multiple market estimates of the future value of another index

The VIX index, which all of this ultimately revolves around, itself has no tangible value, nor does its price reflect anything real, not exactly anyway. According to its creators:

[the vix index] estimates expected volatility by aggregating the weighted prices of SPX puts and calls over a wide range of strike prices.

This is an oversimplification. The VIX doesn’t care about the price of those options, it cares about the implied volatility embedded within those prices. The way to get that info, according to its creator’s own white paper, is by applying the following formula:

WTF was XIV? A loan for trading to achieve the opposite of the daily moves of an index of an average of the price of multiple market estimates of the future value of another index whose value is calculated via an incomprehensible formula that I can’t even shrink down to fit a single line of a Medium post.

Forget understanding any of that. I’ll pay Chairman Clayton that Bitcoin if he could just recite that explanation fast three times.


Bitcoin, as we know, is volatile. So is the VIX. But whereas tracking the former with a a ETF is straightforward, doing it accurately for the latter is almost impossible — because you can’t buy something that doesn’t exist. Instead, to even attempt to replicate its price, you have to go through the kind of financial contortion that makes Proof of Work look easy.

Adding insult to injury, all of the so called concerns that Jay Clayton has recently voiced about a Bitcoin ETF always applied to vol products. Worried about manipulation? Here’s academic research pointing it out in VIX instruments. Liquidity too low? Also true with vol, where the tracking products are at times more liquid than the instruments they track, opening the door to tail-wagging-the-dog death spirals like what happened a year ago.

Does the SEC care? Of course not. How can we be sure? Because even after the XIV disaster, similarly structured (and named) products like the ZIV are allowed to exist. That product’s own fact sheet states that it’s meant for “sophisticated institutional investors,” and yet anyone can buy it in their Etrade account — because Jay Clayton cares. What happens when ZIV also blows up and we’ve hit the end of the alphabet, nobody knows.

What we do know is that the SEC’s constant rejection of a Bitcoin ETF can’t be about investor protection. Maybe they just don’t like crypto (or don’t like the kind of people who like crypto). Or maybe they don’t understand it, in which case I will gladly provide them with a complimentary book or seminar.

But the next time the Chairman says anything about protecting investors, someone should ask him a simple question: WTF was XIV?