Back in late 2012, when the former chief of the NY Fed's markets group, aka the head of the PPT, Brian Sack was replaced with the current head of the NY Fed's trading desk, Simon Potter, we observed something curious: [9]there was a dramatic, and record, surge in non-commercial bearish VIX bets the moment Potter took over, which courtesy of the reflexivity relationship between the VIX and the underlying market (since exposed everywhere, read: "Conspiracy "Fact" - VIX Manipulation Runs The Entire Market [10]"), helped push stocks higher.
[11]
Ever since then, the infamous VIX slam in the last hour of trading, or during other opportune intervals in the trading day, has served as a valuable and efficient means to halt any selloff momentum and to reallign the market with its centrally-planning mandated path: higher.
In fact, it has gotten so that trading of VIX (and its close cousin, the USDJPY carry trade) has replaced trading the S&P courtesy of the far greater embedded leverage available to those two asset classes.
Fast forward to the recent surge in market volatility, when courtesy of JPM we find something curious: it is no longer the Fed, nor its capital markets proxy, Citadel, nor even the banks or hedge funds that are the primary sellers of volatility. It is retail investors themselves!
Sure, institutionals did rush to sell vol, mostly in the form of surge in the VIX put-to-call ratio, but the jump was somewhat timid by historical standards. JPM explains:
The sharp rise in equity volatility with the VIX spiking to levels last seen in August 2011 is raising questions about volatility flows. One flow that reveals the intentions of institutional investors is related to VIX options. The ratio of the open interest of VIX put options over the open interest of VIX call options has been rising since August 17th, suggesting that institutional investors are increasingly positioned for a decline in vol similar to what they did during the October 2014 volatility episode (Figure 6). But what is also evident from Figure 6 is that the recent rise of the ratio of the open interest of VIX put options over the open interest of VIX call options rose by a lot less in the recent correction vs. the rise seen during August 2011. At the time, in August 2011, that ratio had tripled to 1.2x vs. 0.6x currently. One explanation for this discrepancy is that the vol of vol (VVIX) has spiked by so much in the most recent correction, to 170% vs. a peak of 130% in August 2011, that it reduced on the margin the incentive by institutional investors to buy VIX puts.
But while institutions may not have rushed in to sell volatility by the boatload, perhaps having gotten very burned when the VIX soared above 50 on August 24, retail investors - with far smaller balance sheets - are perfectly happy to take on the risk that even the "big boys" are shying away from. To wit:
Retail investors sold VIX ETFs and flocked into inverse VIX ETFs in recent weeks in record amounts, in even bigger amounts than those seen during August 2011. That is, retail investors have shown much greater appetite to sell volatility from here than institutional investors trading VIX options. This is shown in Figure 7 where the 4-week flow into VIX ETFs minus the flow into Inverse VIX ETFs declined to -$3bn, well beyond the previous record low of -$1.8bn seen in August 2011 or October 2014. Retail investors bought a record $1.4bn of inverse VIX ETFs during the last week of August alone. At the same time, they have been heavy sellers of VIX ETFs by around $400m per week over the past two weeks.
[12]
In other words, if only looking at VIX (and inverse VIX) ETF flows, retail investors have never been more bullish: they are even more bullish than institutions! JPM confirms as much: "the greater bullishness of retail investors is also seen in equity flows which outpaced bond flows in recent weeks."
Ironically, the central-planning hostage taker of the entire market has managed to turn the hostages to do its bidding. Call it Stockholm Syndrome gone bad.
And yet, this is somewhat confusing: just a few hours ago, Goldman was claiming [13]that investors sentiment has never been more bearish:
Our S&P 500 Sentiment Indicator based on futures positioning data sits at 0 on a scale from 0 to 100, where it has been for seven of the past eight weeks, the longest stretch in its eight-year history.
Which is true... if one ignores retail investors who seemingly have never been more bullish. Which also explains our conclusion to the earlier Goldman post: "As for everyone being bearish, we'll just take Goldman's "honest" word for that."
"Honest" word indeed.
As for retail investors who are now massively net short VIX ETFs: we hope there isn't another risk-on moment that send the VIX back into the stratosphere. Last time we checked, the Fed was not in the "bailing out the small retail investor" business.
