Here Is What Was Behind The "Largest VIX Buy Order In History"

Less than a month ago, Goldman Sachs presciently published a note research report "VIX ETPs are now net short vega - should we worry"...


.... which as the title suggested showed that the net position of VIX ETPs has become short over the past few weeks, for only the second time in their eight year history.


This odd finding - namely that the VIX ETPs had shifted their traditional vol bias from long to short - prompted the Goldman strategist to ask glibly "Should we worry?"

Less than a month later we have the answer: Yes, Goldman, you should worry, because the historic short squeeze that took place overnight in VIX, which sent it over 100% higher - the biggest jump in history - was precisely a result of this Goldman observation, namely that ETPs were now aggressively shorting vol.

Here is what happened - as Morgan Stanley explained overnight - following this first ever shift by ETPs to net short vega, a move that in retrospect will prove to be suicidal for the entire industry, which now faces one giant termination event.

In short, "the VIX market saw the biggest net buying pressure on record." According to Morgan Stanley calculations, ETPs had to buy 282,000 VIX futures to rebalance their short gamma: "this was the largest VIX buy in history, dwarfing Friday’s previous record of 78,000." Dealers hedging their short gamma exposures likely contributed to VIX futures demand as well.

And since most of the rally in VIX futures happened after the 4:00 pm cash close, there was no time for investors or the issuers of the VIX ETPs to react.

It gets better: according to Morgan Stanley this move was "incredible" particularly because VIX and VIX futures were already elevated – and the amount of volatility to buy exceeded the bank's already aggressive estimates (below shows what QDS estimated coming into Monday) and speaks to the size of the short vol exposures in the market:

While this explains the theory, the question is what happens in practice next: will the inverse ETPs - like XIV - continue to exist today? This is up for debate at time of this writing, but for the broader market the implication is clear: the inverse ETPs have effectively delevered down to zero, going from short 230,000 VIX futures to short just 4,000.

The good news from the effective wipeout of a major part of the vol-selling market is that "this means there is much less risk going forward of further vol to buy from rebalancing of these products."

The bad news: holders of the inverse ETPs lost $3.4bn as the products went nearly bankrupt and this removes a steady source of volatility supply over the last year.


Ghost of PartysOver gatorengineer Tue, 02/06/2018 - 09:16 Permalink

All the chaos and yet the ES has not even retraced 38% of the move up since The Don was elected.   To me this has the sweet stench of a buying opportunity over the next few days.  I am just waiting to see when the big houses start to move in.

PS: Do not get caught up in the media doom and gloom reports as they will do and say anything negative if it will adversely impact Trump.  Hopefully you all ready understand this.

PSS: What in the economy has change in the 7 days.  Employment? Corp Profits?  GDP? 


In reply to by gatorengineer

Buckaroo Banzai Ghost of PartysOver Tue, 02/06/2018 - 09:56 Permalink

"PSS: What in the economy has change in the 7 days.  Employment? Corp Profits?  GDP?"

Nothing has changed, it's still the same stupid piece of shit it has been for the last decade, but years and years of leveraged corporate stock buybacks combined with shenanigans like the short-VIX trade have kept the stock market going up despite the fact that the economy is dubious at best, an outright fraud at worst.

In reply to by Ghost of PartysOver

Antifaschistische Ghost of PartysOver Tue, 02/06/2018 - 12:34 Permalink

That's your rationale?  what has changed?  that's a little bit dangerous.  What has changed in the last 10 years?  what has changed since the Dow was at 10k?  Are you assuming the Dow was "fairly valued" when it was at 26k and since nothing fundamental has changed it should return to 26k?  What if "fair value" is at 17k?  What if fair value is at 8K?  Does anyone really know what "fair value" is any more?  Does anyone care?

buying opportunity?   certainly possible...we'd be a fool to bet against a Dow 30k possibility.   or bitcoin at 20k.

have fun...

In reply to by Ghost of PartysOver

overbet El Hosel Tue, 02/06/2018 - 11:10 Permalink

Based on past setups, buying this open was a no brainer. If you trade and didnt know to buy this open then you should probably look for something else to do.

If you want to proceed as if every dip is the big one then youre going to lose. Buying this open every time Ill win 1000 times over what you would ever lose buying the open on the big dip that doesnt come back. If youre scared to buy this dip on the open, just stay out of the market theres no hope for you.

In reply to by El Hosel

Polynik3s J S Bach Tue, 02/06/2018 - 10:12 Permalink

This complexity can be understood by any 100 IQ person. These are not the smartest men in the room, even a dog knows to steal meat off of a table. Please do not mistake avarice and rapacity for wise stewardship.

As for suitable entertainment... if you enjoy watching the hyenas that raped your mother now encircle your sister... 

TheRothchilds are plunging you into WWIII, soon you will call for blood... But whose? Probably whomever they tell you to hate.

In reply to by J S Bach

mkkby Polynik3s Tue, 02/06/2018 - 15:27 Permalink

Interesting that goldman warned of the inbalance ahead of time.  That should have been a clue that they and others were going to squeeze the shorts.

Run your own money.  Never let some fund manager with no skin in the game *help* you.  They always get fucked by the smarter banksters who have better information.

In reply to by Polynik3s

Cash Is King J S Bach Tue, 02/06/2018 - 10:37 Permalink

“Real” Traders did a shttload more than people realize. Aside from their actual duty of, you know, making a mkt (ie two sides) they, by the 10’s of thousands, provided liquidity during mkt hours including the most volatile of times. Machines and the pajama warrior crowds have never been asked for a mkt to work 2 million and watched their qtr  evaporate knowing the only that they did the right thing for a great customer. That’s why it’s called Trading! Sometimes you eat the bar and sometimes the bar eats you! We never had flash crashes (except 97 after the halt, also caused by “machines”) when humans were in control and believe it or not the amount of greed, while more spread out, was actually more contained!

as the old adage goes: be careful what you wish for..... & now it’s too late so quit bitching. Try making a size market dickhead, it’s a great way to learn how to trade!

In reply to by J S Bach

OneZero J S Bach Tue, 02/06/2018 - 13:23 Permalink

Problem is Johann, that it has been a REALLY profitable life for the last 20-30 years or so. We need to trade stocks, bonds and commodities. Toss in some limited futures action. Baskets of stocks and baskets of commodities? Ok. But BETTING on the direction of a stock, bond, sector, commodity or the market as a whole, so that people make money when values go down has got to go.Bets placed that certain bonds would go tits up is what sparked the crisis in 2008. Eff these people who want to accumulate money, but don't want to create wealth.

In reply to by J S Bach

hannah J S Bach Tue, 02/06/2018 - 14:07 Permalink

this is so easy a 8 year old would i will explain. wallstreet creates fake bs financial products which they sell back and forth to each other causing the price to go to the moon. then the whole thing crashes to the moon so the taxpayer can keep bailing out wallstreet with grants and zero interest money and they do it over and over easy because it is all bullshit.

In reply to by J S Bach