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Volatility, Inc.; Carnage, but no volatility crisis; Debt ceiling the real worry; VIX ETPs

Observations & Insight

Follow up – Sounds like Seth Golden is…. OK?
Spencer Doar – JLN

Lots of news today, as one would expect.

Yesterday’s blog on the short volatility trade was titled Vol-cano Erupts – How’s Seth Golden Doing? Funnily enough, Quartz was able to catch up with Golden – A day-trading millionaire says he isn’t fazed by his favorite strategy blowing up.

Of course, with a guy that talks his book, you get lines from the story like this: “He lost money on Monday, but it wasn’t anything he hasn’t experienced before.” Uhhh, how has Golden experienced an ETN liquidation/liquidity/trading halt event like this week’s? What is his reference point? The VIX pop to 16 over North Korea fears last year? His Twitter feed had the following: “… good morning my fellow tweeters, sorry to say to all the haters, ‘I’m still alive and kicking’!” So, whatever.

Speaking of Twitter, the funniest related social media post goes to @selling_theta – “I’ve already preordered the new Michael Lewis book on yesterday’s short VIX massacre.”

As for the overall hype, this still feels like an education and regulation issue. Being up in arms over the performance of the various VIX ETPs themselves doesn’t really make sense. What does make sense is concerns over how these products were presented (and perhaps how after hours trading trading is conducted…). Trading a product that you know has a likelihood of blowing up is very different from trading a product that you classify in your head/portfolio the same way as, say, some ETF tracking the performance of large cap French stocks. It’s a safe bet there aren’t many prospectuses for those sorts of products that delineate what can happen if their underlying plunges 80 percent.

In other news, electronic interest rate options ADV at CME reached a record 1.43 million in January, including a single-day record on January 18 in which 1.3 million eurodollar options traded on CME Globex, surpassing the daily pit volume.

Also, early bird pricing for the Options Industry Conference ends on February 16, so get your discounted tix ($200 off) to Amelia Island while you can.


February Options Volumes Thus Far Via OCC
(Click for larger image)

Lead Stories

Volatility Inc.: Inside Wall Street’s $8 Billion Mess
Dakin Campbell, Dani Burger, Donal Griffin and Carolina Wilson – Bloomberg
It was the hot trade on Wall Street, a seemingly sure thing that lulled everyone from hedge fund managers to small-time investors.
Now newfangled investments linked to volatility in the stock market — until a few years ago, obscure niche products — have exploded in spectacular fashion. The shock waves have only just begun.

****SD: Do you know what is currently hotter than the short vol trade over the past few years? Throwing a lot of shade at volatility. (Funny, this morning when my sleepy eyes scanned the byline, my brain combined the last two authors’ names together and I had to do a double take after thinking Don Wilson was a coauthor.)

Carnage, but no crisis as long as FX and rates volatility stays low
Jamie McGeever – Reuters
The explosion in volatility that sent stock markets into a tailspin this week is a wake-up call for investors who had grown far too complacent that the “Goldilocks” good times would never end.
But talk of “crisis” is premature. For that to unfold, currency and bond markets need to be rocked by a similar surge in volatility. And so far, that hasn’t happened.

VIX, Shmix. The Debt Ceiling Is a Real Worry
Randall Forsyth – Barron’s
Here we go, again. The debt ceiling looms and Uncle Sam stands the chance of (technically) defaulting again unless Congress gets around to increasing the federal government’s borrowing limit.

How XIV and SVXY Went Off the Rails and Took the Market With Them
Mark Sebastian – TheStreet
As of Monday after the close, almost everyone knows what VelocityShares Daily Inverse VIX ST ETN (XIV) and ProShares Short VIX Short-Term Futures (SVXY) are. For those that do not, the two of them are inverse exchange-traded products (ETPs) of the iPath S&P 500 VIX ST Futures ETN (VXX) .

****SD: Very similar from WSJ – Born to Die: Inside XIV, the Busted Volatility ETF. Seeking Alpha has a good one too taking on the “swan angle” – A White Swan Happens

Quant-Blame Game and ‘Crack Analysis’ Behind the Flash Crash
Dani Burger – Bloomberg
Funds may not be big enough to cause dislocation, AQR says; Volatility targeting, ETPs, CTAs come under heat amid selling
Whenever there’s a sudden crash seemingly devoid of rhyme or reason, the first culprits in the firing line tend to be the “algos.”

Volatility’s Return Is a Lifeline for Becalmed Bankers
Nisha Gopalan – Bloomberg
There’s a silver lining to this week’s stock market rout: the likely end of Wall Street’s Asia woes.
The return of volatility will help buoy trading income for investment banks from Goldman Sachs Group Inc. to Deutsche Bank AG, which have slimmed down their businesses in response to a prolonged period of calm.

****SD: But yet, banking stocks were hit like everybody else.

Exchanges and Clearing

Cboe says Vix products not to blame for market rout; Exchange group defends flagship volatility index as recriminations fly
Joe Rennison, Gregory Meyer and Nicole Bullock in New York – FT
Cboe Global Markets has defended its flagship Vix volatility index, after investors and analysts blamed products that seek to track the measure for exacerbating this week’s ructions across global stock markets.

MIAX PEARL Achieves over 4% Market Share on Eve of One-Year Anniversary
MIAX PEARL announced that it achieved over 4% market share on February 2, 2018, establishing a new market share record on the eve of its one-year anniversary. Successfully launched on February 6, 2017, MIAX PEARL currently lists and trades options on over 2,700 multi-listed classes and has experienced a dramatic increase in market share and contract execution in just one year’s time. In addition to its recent market share record, MIAX PEARL also established new monthly and daily contract records of 10,743,160 and 1,186,574 in January 2018 and on February 2, 2018, respectively.

****SD: Pretty amazing given its youth.

Goldman downgrades Cboe after the ‘unwind’ of wacky volatility products
Thomas Franck – CNBC
A part of Cboe Global Markets’ key futures business is at now risk after the implosion of volatility-related securities this week, according to Goldman Sachs.
The firm lowered its rating for Cboe shares to neutral from buy, predicting investors may flee from the company’s key product franchises.

****SD: JPM also downgraded. The FT has the overall picture – Cboe fall deepens on concerns short-vol woes will hit VIX franchise

Proceed With Plan To Include Equity Index Options In Its After-Hours Derivatives Trading
Hong Kong Exchanges and Clearing Limited (HKEX) informed that it is proceeding with its plan to include its most actively traded equity index options – Hang Seng Index (HSI) Options, Hang Seng China Enterprises Index Options (HSCEI) Options, Mini-HSI Options and Mini- HSCEI Options (equity index options) – in the T+1 Session (after hours trading) of its derivatives (futures and options) market. The changes will be made after a readiness test scheduled for the early second quarter of this year and the final regulatory approval. They are expected to be introduced before the end of the second quarter.

Intercontinental Exchange Reports Fourth Quarter 2017 GAAP Diluted EPS of $2.08 on Revenues of $1.1 Billion; Fourth Quarter 2017 Adjusted Diluted EPS of $0.73
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses and provider of global data and listing services, today reported financial results for the fourth quarter and full year of 2017. For the quarter ended December 31, 2017, consolidated net income attributable to ICE was $1.2 billion on $1.1 billion of consolidated revenues less transaction-based expenses. This included $764 million of a deferred tax benefit related to U.S. tax reform. Fourth quarter GAAP diluted earnings per share (EPS) were $2.08. On an adjusted basis, consolidated net income attributable to ICE was $433 million in the fourth quarter, and diluted EPS were $0.73.

SGX reports market statistics for January 2018
…Total Derivatives volume was 18.1 million, up 16% month-on-month (m-o-m) and up 55% year-on-year (y-o-y).

Euronext announces volumes for January 2018
…In January 2018, the overall average daily volume on derivatives reached 561,231 contracts, up +25.9% compared to January 2017 and up +4.9% compared to the previous month.

VIX Options Volume Explodes on Volatility Surge
Schaeffer’s Research
The CBOE Volatility Index (VIX) surged 115.6% on Monday — its largest one-day pop on record — as panic selling hit the U.S. stock market. And as inverse volatility notes plummeted while the Dow racked up its biggest two-day point drop to date, VIX options were in high demand, with volume hitting a record high on Friday and logging its second most-active trading day on Monday. Plus, according to Trade-Alert, total marketwide option volume of 35.5 million contracts was the third highest ever.

****SD: Breakdown from yesterday afternoon about Friday’s and Monday’s activity in case you missed it.

NZX To Adjust NZ Milk Price Options Exercise Price Interval
NZX will adjust the NZ milk price options minimum exercise price intervals to NZD 5 cents from NZD 10 cents, effective 8 March 2018.

Regulation & Enforcement

Regulators Let Wall Street Turn VIX Index on Its Head
Stephen Gandel – Bloomberg
The best thing you can say about sudden market drops is that they can point out the market’s weaknesses and create a road map for regulators to clean up any excesses. The bad news is that regulators look increasingly uninterested in protecting investors from the market’s potholes.

SEC, CFTC Announcement Could Determine The Future Of Bitcoin, Ethereum
Christophor Rick – ValueWalk
Today, in Washington D.C. the Senate Banking Committee is meeting and some of the topics to be covered are cryptocurrencies and Initial Coin Offerings (ICOs). The entire cryptocurrency market was watching with bated breath to see what stance America might take on virtual currencies. Would they begin a crack down? Would they ban? Might they regulate? Here’s what they had to say.


A Map to the Underworld: $2 Trillion of Volatility Trades Here
Dani Burger – Bloomberg
Products tied to market swings put in spotlight amid selloff; Inverse VIX ETPs grew in popularity with short-vol trade
For a fledgling asset class whose idiosyncrasies are understood by few, there sure is a lot of money swirling around in volatility trades.

VIX traders see Feb returns from +30% to -95%
RCM Alternatives
With our whitepaper covering the various ways investors invest in the VIX, how to trade the vix infographic, and various VIX posts – we should have expected our inboxes to be filling up with people asking how the various VIX and volatility traders in the managed futures space performed this week with the VIXmageddon on Monday. And have they ever, with investors curious as to how these firms managed the first real VIX spike since maybe 2008 (with honorable mention to 2011).

Tail-Risk Hedge Funds Doubled Their Returns on Volatility Spike
Miles Weiss – Bloomberg
Vineer Bhansali, founder of LongTail Alpha, said this week’s sudden spike in market volatility fueled gains exceeding 100 percent at some of his tail-risk funds.

****SD: The flip side = Hedge Funds Shorting Volatility ‘Forced to Puke’ as Stocks Drop

Huge VIX Trader ‘Elephant’ Takes Profits on Volatility Rally
Gregory Calderone – Bloomberg
The VIX “Elephant” appears to have returned to the market one day after the Cboe Volatility Index’s historic rally to lock in a portion of gains from last week’s trading.

Out-of-Whack Volatility Gives Strategists Hope of Calm Ahead
Joanna Ossinger – Bloomberg
Cantor, Credit Suisse think market distortions can’t last; VIX and its options showing moves that may be hard to maintain
Volatility and options prices are so distorted that they’re likely unsustainable, offering hope to some strategists who predict the global stock selloff may resolve quickly.

I Was Struck by a Black Swan and of Course Markets in Turmoil
Howard Lindzon
I am an idiot. Here’s the story.
I have a fascination with volatility. I don’t trade futures or options but have dabbled in a product called $XIV which is a hopped up futures ETN (not an ETF – so it is basically an I owe you with no underlying assets) that crashes when market volatility explodes.

****SD: I missed this on Monday. His follow up post – Black Swan…The Day After the $XIV Titanic

The Best Hedge There Is
Josh Brown – The Reformed Broker
My friend Tracy Alloway has the definitive article about what went on with the volatility exchange traded products that blew up this week and probably triggered the historic bout of volatility we’re undergoing right now. The fact that these are Frankenstein products, built by maniacs, for use by maniacs, should be stated at the outset.

****SD: The end goes like this – “As for the people blown up by shorting volatility, or going long volatility in the wrong way via a flawed product? Play stupid games, win stupid prizes. Vol trading is for professional traders. Everyone else should be taking the right amount of risk so that vol isn’t a potentially destructive issue.” Given that first paragraph, does that mean then that professional vol traders are all maniacs?

Strategist Who Warned on VIX Says Forget About Buying the Dip
Blaise Robinson – Bloomberg
Back in November, he warned about the risks of overcrowded short positions on volatility. Now he says don’t even think about buying the dip in U.S. stocks.
Societe Generale SA’s Roland Kaloyan sees rising bond yields choking the U.S. bull market, betting that the S&P 500 will end the year at 2,500 points, some 13 percent lower than the benchmark’s record high hit in January.

Wall Street FX Strategists Hit Reset After Euro Calls Fall Short
Alexandria Arnold – Bloomberg
Euro up more than 3% in 2018, above prior targets for year-end; Some analysts now predicting move toward $1.30 area for euro
Wall Street’s top currency strategists had the right idea when it came to the euro — they just weren’t right enough.


Bitcoin Volatility Less than Stocks’ ‘VIX’ Index, SEC Says
Jen Wieczner – Fortune
The stock market’s wild swings are making Bitcoin’s price crashes look tame.
As the Dow Jones industrial average continued seesawing Tuesday after plunging a record 1,175 points the previous day, the heads of the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission were on Capitol Hill answering lawmakers’ questions about the risks posed by another highly volatile asset class: cryptocurrencies such as Bitcoin.

The Selloffs That Transformed Wall Street
Alex Eule and Avi Salzman – Barron’s
The Dow Jones Industrial Average suffered its largest ever one-day point drop Monday when it closed down 1,175 points, but in the sweep of history the 4.6% selloff will be a minor footnote.
Monday’s move didn’t even reach the level required to trigger circuit breakers for trading, which kick in with a 7% decline for the S&P.
We looked at the history of major one-day crashes — and the resulting market reforms — on the 30th anniversary of the 1987 crash.

Exchange Traded Concepts, LLC announces REX VolMAXX Short VIX Weekly Futures Strategy ETF (Ticker: VMIN) is expected to resume trading today
Markets Insider
Exchange Traded Concepts, LLC announces REX VolMAXX Short VIX Weekly Futures Strategy ETF (Ticker: VMIN) is expected to resume trading today. VMIN was halted pending news regarding its holdings.

Want a Risk Gauge? Watch the Dollar.
Mary Childs – Barron’s
Investors disenchanted with the VIX and in search of a new risk barometer should look no further than the U.S. dollar, according to Jim Caron, portfolio manager at Morgan Stanley Investment Management.

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Graduate of University of Minnesota School of Journalism and Mass Communication