The VIX is the predominant measure of volatility. Everyone keeps and eye on it, and everyone trades it. Over the last couple of years many have made great money shorting it. However, the focus on it has now led the index to outgrow itself, says its founder. Now, we have a case of the tail wagging the dog, where instead of the VIX measuring market volatility, the market is watching the VIX, which itself incites volatility. In his own words, VIX founder Sandy Rattray, formerly of Goldman Sachs and now with Man Group, says “The Vix has moved from being a measure of something to being something that influences this thing it is trying to observe”.
FINSUM: Observing the VIX has turned into an obsession to the point where it creates a self-fulfilling prophecy. This is quite similar to the case of technical traders who are all observing the same measure and then all act at the same time, creating the reality they predict.