Are volatility-linked exchange-traded products (ETPs) getting too big for the Vix futures market? Are they comprising the price discovery role of Vix futures? Are they the reason why implied volatility curves have become steeply elevated?
As it turns out, Barclays Capital’s equity strategy team apparently thinks yes, it is possible (H/T the FT’s Ajay Makan). Read more
There’s been a lot of talk about the carnage in the TVIX on Thursday. The VelocityShares 2x short-term ETN, whose new issues were suspended by Credit Suisse on February 21 due to “internal limits”, fell 29 per cent. Curiously, the slide came just before an announcement from the provider that some level of issuance would be reinstated.
Understandably, the idea that the re-opening was leaked ahead of time is now doing the rounds. After all, why would the ETN, which had been trading at an 80 per cent premium to NAV, suddenly converge with its indicative value for any other reason? Read more
Helen Bartholomew at International Financing Review (IFR) has an interesting story out this week about the industry’s push to create a workable correlation product.
Currently, if you want to take a view on correlation, it’s pretty difficult. Bilateral correlation swaps generate mark-to-market risk, while option strategies require a lot of delta hedging of both the index and the constituents — what’s more, this may become hugely expensive if and when Europe introduces a transaction tax. Read more
The S&P 500 has suffered its worst day since December amid a global retrenchment in risk assets, the FT reports. The Dow dropped 200 points and the Vix shifted from recent quiet levels to above its 50-day moving average, Reuters adds. A combination of investor nerves about the execution of Greece’s debt restructuring and a spate of bad news about global growth was blamed for the sell-off. Brazil recorded its second-worst annual growth rate since 2003 in 2011, expanding 2.7 per cent, Bloomberg reports.
Holy cow! Index Universe – self-described defenders of the ETF industry — have admitted there may be an issue with these products affecting the underlying assets, after all.
The case in point is the TVIX ETN, which started behaving oddly (ballooning in size) at the beginning of February. Note our stories about the matter here and here. Read more
What on earth is going on with the TVIX ETN?
Last week we pointed out that there has been a hugely unusual rush into the double volatility ETN — which is managed by VelocityShares but backed by the banking prowess of Credit Suisse. Daily trading volume has also been noticeably high. Read more
Macro Risk Advisors’ (MRA) Dean Curnutt has picked on a very interesting development in the land of volatility ETNs. In the last few days there’s been an absolutely astounding amount of vega trading through these products.
As he notes: Read more
Are VIX ETNs and Vix-related funds influencing the Vix futures curve?
Has the popularity of Vix trading come to impact wider volatility surfaces, if not the S&P 500 options used to construct the Vix index themselves? Read more
Here’s something to ponder for the commute home, via Deutsche Bank:
One topic of conversation with investors is why realized volatility has been similar to levels during 2010 (the onset of the European sovereign crisis), whereas investor’s perceptions of the current crisis (as well as option implied volatility) suggest the crisis is closer to 2008/09 in scale and severity. Figure 7 makes it clear that current realized volatility (based on a standard “close-to-close” measure), is broadly in line with 2010 and early 2008 volatility spikes. Read more
Apparently Sarkozy has phoned Hu Jintao on Thursday, to beg er, ask China to wire cash through the EFSF. Somehow.
Shouldn’t someone also be calling Mrs Watanabe? Read more
Another good point on EFSF bond insurance, the subject du jour — from Shahin Vallée of the Bruegel think-tank:
The entire proposal rests on the premise that financial markets are now shunning these debts because of marginal doubts about their recovery value in the case of a credit event and that therefore by guaranteeing a small portion of this debt, the credit enhancement will comfort doubtful investors. This is an inadequate assessment. Financial investors have experienced tremendous price volatility in the last year, which now constrains a wide range of natural buyers who have been forced to adjust the size and duration of their portfolios accordingly. These investors are not driven by expected recovery value but by price volatility, this solution will not change their reaction function at all. For those investors that could be comforted by a degree of credit enhancement, it might be too small to be really enticing. Barring some friendly exceptional instances, experience is that when countries default or restructure, it tends to involve larger haircuts than the credit enhancement would offer. Read more
“When the storm comes, everyone gets wet.”
Remember when we facetiously told you to shelve your adviser? Probably no need to bring him back yet. Read more
“All we have left to show for our three year liquidity orgy is the most correlated period in modern finance.”
That’s the succinct and telling view of volatility guru Christopher Cole at Artemis Capital Management. Read more
The Markit iTraxx SovX CEEMEA contains a basket of 15 sovereigns from Central and Eastern Europe as well as the Middle East. Italy’s CDS spread is now wider than all but one of them – Ukraine.
Looking at the Markit CDX.EM, only Argentina, and once again the Ukraine, can offer chunkier spreads. Outer limits, indeed. Read more
The US Securities and Exchange Commission has added exchange-traded funds (ETFs) to its inquiry into what amplified August’s topsy-turvy swings in the stock market, the Wall Street Journal reports. As part of the investigations regulators will be talking to firms that trade ETFs, asking questions about whether they added to the market’s volatility, the WSJ’s sources say. Exchange-traded funds have surged in popularity and now generate as much as 40 per cent of exchange trading volume in the United States, according to data from Morningstar. They are particularly loved by high-frequency traders who utilise them for index arbitrage strategies. The SEC inquiry, which is likely to focus on the role of leveraged ETFs in particular, is also part of a broader look by regulators into exotic trading vehicles and high-frequency trading. According to the WSJ, the SEC voted last week to open up a public dialogue about the use of derivatives by mutual funds and ETFs, among other things.
Or, turning the leveraged into fondue. Hat-tip to Scott Barber of Reuters graphics:
Scheduled for Tuesday actually:
FT Alphaville just had a very interesting conversation with Ari Bergmann, managing principal at Penso Advisors, with respect to what’s been happening in the world of volatility hedging this year.
And specifically how things have changed since July. Read more
High-frequency traders made a record profit of $60m on August 8, during a 635-point Dow plunge and the NYSE’s fourth-busiest ever trading day, the WSJ reports. If this level of profit could be repeated across 2011, the figure would be $15bn, compared to $7.2bn made by HFT firms in 2009, according to Tabb data. While high volumes led to rick picking for profit, traders said that statistical arbitrage funds and HFT firms specialising in market-making had done especially well. A pair of funds run by Renaissance Technologies have racked up $200m of gains in August, leaving them up 5.9 per cent for the month so far.
August’s extreme stock trading volatility will still not be enough to turn around declining revenues on Wall Street, the WSJ reports. Despite the past week having seen some of the busiest trading days in history, banks are unlikely to take enough commission revenue from trades to make up for declines in the inventories of stocks they hold. Similarly, bond trades have increased but new underwriting deals remain absent from markets. Merger and stock underwriting volumes are also down sharply on the year. Underwriting fees on public offerings for companies bailed out in the crisis are also falling as the government haggles with banks, Reuters reports.
In the natural world a magnitude 9.0 earthquake equals widespread devastation.
If you equate standard deviations with the Richter scale, it looks like in 2008 we experienced something in the region of a 9.2 event. That ties with the idea of widespread devastation.
Marginally more tasteful than a hooker’s drawers anyway… (H/T Michael Roston)
Wednesday 10 August, New York. Tabloid discovers volatility.
The financial turmoil triggered by Europe’s debt crisis, the US credit rating downgrade and increasing concerns over global growth are causing companies to cancel or put off planned initial public offerings, reports the FT. “The primary markets are shut for now,” said Craig Coben, European head of equity capital markets at Bank of America Merrill Lynch. “This is not a good time to launch IPOs.” There have been about $134bn of IPOs so far this year but volatile equity markets will now make it difficult to beat last year’s $281bn total.
As the Vix and More blog duly noted last Friday, not only has spot Vix been spiking in its own right (last print seen around the 40 mark on Monday), the entire Vix term structure has flipped into backwardation over the last 10 trading days:
The Swiss franc.
It has indeed often been cited as being as good as gold. Read more
Macro Risk Advisors, headed by Dean Curnutt, are specialists in derivatives strategy. One of their chief occupations is thus evaluating risk and volatility.
Given that, it’s probably fair to say they’re in a good position to comment on matters “systemic risk” related. Read more
Here’s an interesting observation from a new paper published by the International Journal of Business and Finance (and flagged up by the CXO Advisory Group).
It pertains to the pricing of ETF options, which it turns out are not a like-for-like substitute for index options in the underlying indices they track. Even though you might think they should be. Read more
A bit odd how everyone focuses only on whether or when Italian bond yields will rise 200bps. Isn’t the real problem why a 200bps move would send everything in Europe overboard in the first place?
It’s a single point of failure, no? Read more
Earlier on Monday — Italy’s financial regulator hits the shorts: