Displaying items by tag: vix

(New York)

Worries are rising that the Vix index may be getting manipulated. Last week, the Vix surged 10% just moments before an auction which sets the price of derivatives, which has led many to cry foul. What is so odd about the move is that it occurred despite no corresponding move in the S&P 500, which the Vix is supposed to reflect. Apparently what moved the market was a massive purchase of options betting that the S&P 500 would fall 50% in the next month. The bet is so improbable that it appears it was placed solely to send the volatility index soaring.

FINSUM: This sounds like standard manipulation. Buy a large amount of cheap out of the money options and try to profit on the rise in the Vix. They need to look at the make up of the index, as a $2.1m options purchase should not send the Vix soaring 10%.

(New York)

Everyone is blaming last week’s big volatility on the VIX index. Explanations for the big falls are swirling and include an over-reliance on VIX-linked funds and insurers’ volatility strategy. However, FINRA is now looking into another potential cause—deliberate manipulation of the VIX. FINRA suspects traders have been trying to deliberately influence the VIX to move the price of derivatives. The tip on the behavior was given by an anonymous whistleblower.

FINSUM: Given the track record of misbehavior (e.g. Libor), it would be no surprise if traders were trying to manipulate the VIX. However, it is unclear what role that might have had in last week’s crash.

(New York)

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.

(New York)

The last two weeks could hardly have been worse for investors. Stocks plunged and bonds are falling, with the former led by obsession over the VIX. However, according to Bloomberg there is a ticket timing much bigger than the VIX, and one you probably aren’t paying much attention too—ETF loan funds. The market is much bigger than the $8 bn of volatility linked ETFs that got wiped out over the last couple of weeks, try $156 billion between loan ETFs and mutual funds. The big worry is that since these kind of illiquid underlying investments—actual loans—cannot be sold so quickly as the ETFs, that it could cause huge losses as ETFs stampede out but fund managers cannot liquidate the underlying quickly enough.

FINSUM: So this is a provocative spin on a common argument. Our counter, however, is that credit worthiness is pretty good overall, so it doesn’t seem like an exodus will occur.

(New York)

It seems like every time there is a big plunge in the market over the last few years one can trace the root cause back to a few products traded by people, but more often, machines. Well, it is no different this time as Bloomberg says two tiny volatility products, which now only have $135m under management, were largely responsible for the selloff. One of the products is the VelocityShares Daily Inverse VIX Short-Term ETN, which will soon be delisted. Despite the small size of the products, traders closely monitor the products’ behavior, and that is said to have caused the panic, as traders predicted how the funds would rebalance and front ran that rebalancing.

FINSUM: Well, at least it was not an algorithmic disaster this time. This sounds a lot like good old fashion human gamesmanship.