Heisenberg Report

Doom Loop Update: VIX ETP ‘Risk’ Remains High

Well it seems at least possible that the VIX will spend the entire session in double-digits – no small feat in the current environment.

Overnight, a combination of factors including Catalonia’s refusal to disavow the independence referendum, some shenanigans in Hong Kong, and a throwaway comment about “Minksy moments” from the PBoC’s Zhou Xiaochuan, triggered a bout of risk-off sentiment the scent of which is still lingering like napalm in the morning.

Given that we might have finally seen some semblance of fear, this is probably an opportune time to update you on the “doom loop” or, the potential for VIX ETPs to exacerbate a vol. spike and the knock-on potential for programmatic strats to unwind into a falling market.


According to the latest read on this from Deutsche Bank, the potential for an ETP rebalance to cause problems is still near record highs as VIX ETP providers would “need to buy around $140mm vega on a hypothetical 5-vol spike in the VIX futures curve, which is ~65% of the average daily 1st/2nd/3rd VIX futures volume over the last 2 months.” DB also adds the following, something they usually don’t quantify in these updates: “Even a 2-vol move from current levels would cause $70mn vega-to-buy for ETP providers.”

And even as outflows from short vol. products have continued, inflows into levered long products ensure that the rebalance risk remains elevated. Here are the charts:

As for the likely impact from a disorderly unwind from the vol. control and CTA crowds, the former remains subdued thanks to low realized vol…

…while the latter is notable, but manageable:

Make no mistake, one of these days all of this is going to matter.

Thursday just isn’t that day.