"Large Lot" Stock-Sellers Surge As 'VaR-Shock' Forces Major De-Grossing Flows

Despite the scary stock market headlines, there was no real panic yesterday, as the selling felt fairly mechanical and controlled as the marked was pulled down through 3300 in the S&P 500...

However, "large lot" sellers were very evident as Nomura's Charlie McElligott notes, as Asset Managers reduce their exposure from the 93rd %-ile since 2006 creating an "additional source of supply" into this move.

Additionally, McElligott warns that off the back of this "VaR shock" thought - and in a market structure where volatility acts as your exposure toggle - the multi-day jump in realized volatility (“crashing UP” to ivol)...

...means that systematic rules-based investors will mechanically generate “de-grossing” flows, because positions (in light of volatility) are now too large and have to be sized-down.

Finally, the Nomura strategist notes that index options dealers vs spot as rather significantly short gamma (with spot deeply below the “gamma neutral” level in ES at 3371 today and $283.67 in QQQ), while leveraged ETFs were approx $6B of implied selling on their end of day rebalances across SPX, NDX and RTY products yesterday - both in-turn generating a vicious feedback loop and dictating the horrific price-action into the close seen yesterday.

...for every 1% move, there is ~$700mm additional Delta to either “buy” (into an up move) or “sell” (into a down trade) - which means we’ll continue to be very jumpy in both directions out through those expirations, particularly into said deeply illiquid markets into the election event-risk “VaR-down".

As SpotGamma notes, for today 3300 is the “pivot” strike and we are anticipating a volatile day. Implied volatility is the key signal here, if it breaks down we could see a snap back rally up into the 3360 area. To the downside we see 3265 as support but note that negative gamma keeps building with lower SPX prices.