VXX Vapid Hedge Rubs FINRA The Wrong Way

The VXX is an exchange-traded note that offers investors exposure to the returns of one- and two-month futures contracts on the CBOE Volatility Index (the "VIX Index"). The VIX Index -- referred to by some as the "fear index" --  is calculated using one month put and call options on the S&P 500 Index and is designed to measure the market's expectations of volatility in large cap U.S. stocks over the next 30-day period. The VXX is generally considered a bearish investment, as market volatility typically is negatively correlated with market returns (although not directly correlated to the movement of the market as a whole or to specific equities). The VXX essentially tracks market negativity as reflected in the price of futures contracts. It is rarely if ever considered a suitable hedge for specific equity positions.  

Although the VXX and similar products move in the opposite direction of the indices they track, they have their own independent risks. Most significantly, they are generally expected to lose value as time moves on, and thus they are rarely if ever considered to be prudent long-term investments. The value of futures contracts on the VXX Index generally decreases over time. As a result, the VXX is rarely if ever suitable as a long-term holding, but instead is generally held for brief periods measured in days rather than months or even weeks.

[B]ased on Kavaler's recommendations, two customers bought 3,500 VXX shares-during March and August-2012 for a total investment of almost $58,000. They later sold these shares after holding periods of 79 and 402 days, suffering losses in excess of $28,000. Another customer -- also based on  Kavaler's recommendation -- invested more than $290,000 to buy a total of 27,000 VXX shares between February 2012 and February 2013, ultimately losing more than $114,000 after holding those shares for periods ranging from 30 to 288 days. These customers all held long positions in the same two large-cap equity securities.

did not understand the nature and risks of the VXX, and it was not reasonable to expect VXX shares to increase in value, or even retain their value, over the extended periods through which Kavaler's customers held them. lt likewise was not reasonable to expect VXX shares to serve as an effective hedge against a potential market downturn anticipated from the "fiscal cliff" or other potential future events the timing of which was either unpredictable or known to be at least several months away.

ADVISOR WAS TERMINATED FOR COMPANY POLICY VIOLATIONS RELATED TO SUITABILITY, USE OF DISCRETION, AND MISMARKING TRADES

The iPath S&P 500 VIX Short-Term FuturesTM ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index").  The ETNs are riskier than ordinary unsecured debt securities and have no principal protection.  The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party.  Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due.  An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index. For additional information regarding the risks associated with the ETNs, please see "Selected Risk Considerations" below.

Correlation is a term used to describe the statistical relationship between two or more quantities or variables. Perfectly correlated assets will have a correlation coefficient of one, while the correlation coefficient will be zero when returns on two assets are completely independent.

S&P 500 VIX Short-Term Futures Index TR: 1.00

Barclays US Aggregate Bond Index: 0.16

Bloomberg Commodity Index Total Return: -0.37

MSCI Emerging Markets Net Total Return Index: -0.61

MSCI EAFE Net Total Return Index: -0.76

S&P 500 Total Return Index: -0.82

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November 3, 2015: Bill Singer talks with Shah Gilani, a market analyst with Capital Wave Forecast and Short Side Fortunes, on his trading career and popular investment newsletters; the downside of the rise of electronic stock exchanges; the connection between regulatory issues and volatility; how the SEC has been complicit in the rise of High Frequency Trading; and the implications of scandals like LIBOR and foreign currency manipulation. "Volatility is the new face of the market," Gilani says. "It's here to stay, it's going to increase and it will drive the markets." WATCH

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