Back in February, shares of Cboe plunged amid an extinction level event for a number of inverse VIX products, which imploded after the rebalance risk inherent in their design was finally realized.
The read-through of a dramatic VIX spike for Cboe probably should have been positive, but “this time was different”, so to speak. “This is the first time we can recall where the stock price of CBOE is underperforming as VIX is spiking,” Wells Fargo’s Chris Harvey wrote on February 6, before explaining that “the losses in short volatility are so severe [that] the market is clearly worried about the negative implications for future VIX volumes.”
Five months on from “Vol-mageddon” (you can choose your own fun nickname for February’s VIX spike), dislocations in the volatility complex remain and liquidity has diminished commensurate with the fading influence of the ETPs.
“The drop in VIX futures open interest is very close to the drop in gross AUM in VIX ETPs”, Barclays’ Maneesh Deshpande wrote, in a note dated July 20, adding that the decline in vega outstanding in VIX futures (~200MM) “has been equivalent to the decline in vega AUM of the VIX ETP complex.” The right pane below also suggests that VIX futures volume is suffering from the demise of the ETPs.
Market depth has also deteriorated, in part because of the shakeout of speculators.
With all of that as the backdrop, it’s worth noting that the exchanges were crushed on Monday. Cboe had its worst day since February 6 and fell to its lowest intraday since February 9:
ICE, NDAQ, and CME fared a bit better, but it was an across-the-board wipeout in the space.
“Exchange volumes in July have been awful pretty much across the board,” Richard Repetto, from Sandler O’Neill, told Bloomberg via e-mail.
Cboe will report on Friday, ICE on Thursday. “On the exchange side, we prefer ICE to CBOE as we see upside to ICE estimates amid a more stable revenue backdrop while we see a downside bias to Cboe estimate revisions amid soft volumes around VIX products”, Goldman’s Alexander Blostein wrote, in a note out early Monday morning.
Meanwhile, Virtu was hit hard again to start the week, falling more than 3%. That would be on top of Friday’s horrific plunge that came courtesy of a poor Q2 report in which Douglas Cifu described the operating environment has “markedly worse than the robust conditions we saw in the first quarter”. This is what you call a “high speed” decline:
As far as the outlook for VIRT goes, the above-mentioned Alexander Blostein doesn’t like it.