Why Did DGAZF Go From \$400 To \$24,000 In Just A Few Days?

DGAZF is the over-the-counter version of the now delisted VelocityShares Daily 3x Inverse Natural Gas ETN (DGAZ). Back in June, I wrote about Credit Suisse deciding to delist its suite of ETNs in order to "better align its product suite with its broader strategic growth plans".

I screenshot Google and Yahoo Finance. I happened upon this ETN on r/stocks and r/stockmarket. The Natural Gas market appears relatively uneventful now, and doesn't appear to explain this skyrocket.

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    $\begingroup$ I’m voting to close this question because this is just financial market commentary, not a question about the discipline of economics. $\endgroup$ – Brian Romanchuk Aug 13 '20 at 11:41
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    $\begingroup$ @BrianRomanchuk Is financial market commentary off topic? $\endgroup$ – Giskard Aug 13 '20 at 15:34
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    $\begingroup$ A situation that is not an arbitrage due to limits to arbitrage is squarely in the field of financial economics (why the divergence from NAV?) -- not market commentary (where is the price going?) -- since the question explicitly notes that natural gas prices did not move. If asking about a divergence from NAV and possible limits to arbitrage is market commentary, then any discussion of Tuckman and Vila (1992), Shleifer and Vishny (1997) and even Diamond and Verrechia (1987) would also be market commentary. That seems difficult to defend and a sadly narrow definition of economics. $\endgroup$ – kurtosis Aug 13 '20 at 19:43

Exchange-traded notes are notoriously illiquid, as discussed in Henderson, Pearson, and Wang (2015). In particular, their only market makers are generally the issuers. Therefore, any move by holders to trade ETNs can have very large price impact. Since the shares were delisted and moved to the Pink Sheets, they are even less liquid since many institutional holders will not hold OTCBB or Pink Sheets shares.

What this looks like is a pump-and-dump manipulation. Furthermore, the above liquidity issues make this ripe for such a scheme. The manipulator can just keep lifting the (wide) offer and the shares will move up quickly. That is often accompanied by a large rise in volume. Then they can start shorting shares (which could explain the fall late Wednesday) as others buy the shares based on momentum. Eventually, they end up short, buying pressure abates, and prices fall. In this case, the exit is even nastier: the announced redemption at NAV will cause the price to fall more quickly -- so their short would make money even faster. Then, they could offer a few cents over NAV to close their short position.

If you look at the price and volume chart, you can see that volume increased while the stock was moving up sharply. That looks like a typical pump-and-dump price and volume chart. That amount of volume yielded large gains, but it likely was too much for Credit Suisse to keep up with hedging or creating new shares to bring the price back down toward NAV.


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