Well in light of today’s midday massacre for retail investors who apparently learned very little (if anything) from Monday’s wipeout of XIV, this is probably just as good a time as any to show you a couple more amazing charts illustrating what will undoubtedly go down as one of the more dramatic speculative blowups in history (if for no other reason than the sheer blatant stupidity inherent in the whole thing and the fact that the New York Times Target manager story put a face and a name to the mania).
But before we do that – and really, this kind of sets the stage – note that UVXY, TVIX, VXX, and SVXY are among the most traded ETPs on the board Thursday, proving beyond a shadow of a doubt that irrespective of the directional bias, home gamers are by no means exhibiting any caution when it comes to piling back into vehicles that, on the long vol. side, have been the equivalent of simply lighting money on fire for years, and on the short vol. side, have now proven to be prone to blowing up entirely at the drop of a hat. Have a look at the volume on these things through lunchtime on Thursday:
So yeah, folks are still interested in the space and perversely, it seems entirely likely that the publicity surrounding Monday’s XIV blowup has only increased the propensity for retail investors to trade these things.
The general consensus is that the risk has abated materially as we noted Tuesday in our multiple postmortems (here and here) and also this morning. Here’s the chart that matters:
That’s the rebalance risk or, more simply, the size of the panic bid in the event of an N-vol spike (that chart shows what the size of the rebalance flow was for a 5-vol. spike going into Monday, but you can make a similar chart for a 3 vol. move, etc.).
Have a look at the following charts from SocGen which show you the theoretical flow (c.270K VIX futures) from the rebalancing of leveraged ETPs on Monday.
That rebalance flow was a 23-standard deviation event. I’m not sure what color swan that is – maybe psychedelic?…
As far as the risk going forward from short vol. ETPs (assuming they don’t all end up getting wiped out), SocGen notes that they “would need two to three years of near perfect market conditions to regain their prior size.” Here are two more iterations of the Goldman chart shown above:
Theoretically, that should mean that we can put this behind us. “The risk of the tail wagging the dog (rebalancing from leveraged VIX ETPs worsening moves on the VIX) is also much lower after the moves on the VIX this week,” SocGen goes on to write, adding that “not considering assets under management of XIV and 2049 (NEXT Notes ETN) — the two notes that are up for redemption — the total assets under management for leveraged ETPs on the VIX are now back to the levels of 2012-13 [and] that implies the rebalancing flow from these instruments has also greatly declined.”
Still, one wonders about the levered long products. I mean, they’re part of the rebalance risk too. Just like the short ETPs, they are required to buy VIX futs when volatility spikes. So are they a risk if people start piling into them on the assumption that volatility will sustain a bid or keep rising? For their part, Goldman thinks not, and here’s why:
Levered long ETPs remain sizable ($1.1bln AUM), but per unit of VIX futures exposure, they trade less on a volatility spike than inverse products would (filling the gap between long futures that have risen and a fund NAV that has risen faster requires fewer units of futures than between a NAV and futures position that are moving in opposite directions). The higher level of VIX futures also makes an N-point move a lower percentage move than it would be with lower VIX futures prices.
We’ll go with that for now. But really, these things need to be regulated out of existence because as today’s trading shows, retail investors will not learn, so it’s best to just not give them the option.
Why is government intervention your answer?
Put your hand on the stove, you learn. And those who don’t, well so sorry for them, but you don’t outlaw the stove.
Heisenberg,
Have you seen write up by Clark Landis on SA about Monday?
I think credible his theory that much of the difficulty came from liquidity providers front-running a locked-in buying requirements by vol etn and etf s. So really a transfer of about $1B of retail vol buyers and sellers money to these front runners. That the trouble was not only from S&P market change but from street traders taking advantage of the structure of vol markets and the mandated rebalancing mechanisms of XIV, SVXY, etc. This I think is an important perspective of what happened. Nothing illegal, but shows that part of what was not anticipated by retail investors was the risk inherent in the positioning and motivations of liquidity providers. As we’ve seen, contango to retail is like crack to an addict and being explicit about and accounting in various ways for this front-running waiting-to-happen woud be useful. Also, calling out this aspect of what happened may put some expectation that SVXY for example put in allowances in their procedures such that they may risk uncoupling their efforts to unthinkingly follow index-related returns when market dislocations occur. That is they can not only halt trading in shares but delay rebalancing until. Is this not workable, would it not have worked monday? If they don’t change how they do things than this will happen again and again.
Mike
Is ZIV any safer or subject to the same issues?