Chaos Over a Plunging Note

Regulators are examining volatile trading in a complex exchange-traded note that caused it to lose 60% of its value in the past week.

The Securities and Exchange Commission is looking into the VelocityShares 2x Long VIX Short Term Exchange note, managed by Credit Suisse Group AG, which had about $700 million in assets before the decline, according to people familiar with the matter. The SEC review is preliminary, the people said.

The scrutiny comes amid rising investor alarm and confusion over trading in exchange-traded notes. The Credit Suisse note, which trades as TVIX and is designed to track stock-market volatility, plunged 29% on Thursday last week and then another 30% on Friday, even though market volatility was little changed. Another exchange-traded note, a Barclays Capital product designed to track natural gas, plunged this week for reasons that investors say remain unclear.

Spokeswomen for Credit Suisse and Barclays declined to comment.

Market observers say the confusion underscores the risky nature of exchange-traded notes. While hedge funds are usually the most active traders of the securities, the notes have become more popular with smaller investors, in part because they are low cost and easy to trade.