Credit Suisse Will Retire DGAZF And Redeem Note At Fair Value

David Dierking

If you've followed the saga of the VelocityShares Daily 3x Inverse Natural Gas ETN (DGAZF) over the past few days (I wrote about it HERE just yesterday, in case you want to catch up), it appears that Credit Suisse, the note's issuer, will finally be bringing it to an end.

Long after it probably should have, Credit Suisse announced last night that it would be accelerating the note (in other words, speeding up the process of redeeming it) and will be doing so at fair value.

From the Credit Suisse press release:

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. The accelerated valuation period will be a period of five consecutive index business days, which is expected to be from August 14, 2020 to August 20, 2020. The acceleration date is expected to be August 25, 2020, three business days after the last day of the accelerated valuation period.

Translation: DGAZF shorts might be able to breathe a sigh of relief. It appears that Credit Suisse is going to try to make things right by doing what they should have done when they originally announced the delisting back in June.

How Exactly Did This Happen In The First Place?

In my article yesterday, I noted how DGAZF went from a share price of $400 (a stretch in and of itself given that the underlying asset value was around $120 at the time) to roughly $24,000 this week, about 200 times its NAV.

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With many unknowns as to how this happened given the relative lack of information available, I speculated that it could be investors paying ridiculous multiples for natural gas exposure ahead of the winter months or it could simply be a function of a wild imbalance of buyers and sellers in a thinly traded security in an unregulated market.

It looks like the latter played a part in this, but the more likely reason appears to be short sellers trying to unload existing positions. With no new shares of DGAZF being issued and no buyers of existing shares present, ask prices got driven up to unbelievable levels.

Again, I'm speculating a bit here, but it's possible that a potential buyer could have sensed desperation from existing short position holders and demanded a ridiculous price in order to deliver shares to close out the short.

There's some evidence in yesterday's trading data to suggest that this could indeed be the case.

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These aren't big block shares of DGAZF being traded here. These are, in most cases, single share transactions. In thinly traded securities on the pink sheets, it's easy to move the price of a security significantly in a way that's difficult on the larger exchanges.

Is a trader who's willing to effectively hold shorts hostage by driving up share prices to ridiculous levels guilty of market manipulation? Yes. Is the behavior unethical? Probably. Is it illegal? I don't honestly know.

At best, it's shady.

One commenter on my article yesterday had a personal experience as a DGAZ (and later DGAZF) short.

I personally lost $250k today. Margin call, my IB account is locked even though I talked to IB today and was told to just wait and they wouldn't be liquidating accounts due to the DGAZF manipulation. I'm told that Credit Suisse owns most of the shares loaned to Interactive Brokers. 140% of float. I shorted 20 shares of DGAZ months ago, betting gas would go up (which it has) which then became DGAZF over the summer..... I didn't realize that Credit Suisse would be the market maker of the new security and manipulate it to rake in HUNDREDS OF MILLIONS over the Nav of their own security, which is currently $124! So, my bet was right and I would have made money if they weren't complete frauds, but apparently they control the price of the security they have loaned out, so they are squeezing the shorts into bankruptcy. How are they not held responsible for this fraud?

To be fair, I don't think Credit Suisse was directly responsible for what happened, but it was definitely an accomplice to it. Choosing to delist DGAZF back in June and let it float out there unmanaged instead of just redeeming it outright to close the books on it was a bad decision. They essentially allowed this to happen by not doing the right thing in the first place.

Shorts, like the reader above, were probably correct in betting that natural gas prices would rise, which they have. Once ready to close out the position sitting on a paper profit, they instead found prices manipulated into to the tens of thousands of dollars and were suddenly facing thousands, if not millions, of dollars in losses depending on the size of the short.

And brokers don't care about price manipulation. They want their margin calls (although the reader seems to have found a sympathetic one willing to wait to drop the hammer for now).

Conclusion

If there's a cruel twist to the story, it's that Credit Suisse is accelerating the redemption of this note only. There are 8 others out there, including ETNs exposed to gold and silver, that could see the exact same experience play out.

I want to give Credit Suisse some credit for doing the right thing, but they clearly haven't fully learned.

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