Cboe Hosts Call On Recent VIX Chaos

Update: As the 4:30 ET call began, Ed Tilly, the CEO of Cboe, hopped on an analyst call Wednesday afternoon to dispel certain "misconceptions" about the events of Monday, which left many retail traders totally wiped out and forced the liquidation of one popular short-VIX ETF.

Questions and misconceptions - it's largest single day increase on record. This is important because VIX continued to function as did the ETPs connected to it.

During the unprecedented surge, VIX and VIX-related ETPs continued to work as designed, said Tilley. Funds that were long volatility benefited, while those who were short suffered, Tilly said.

Of course, as we've noted in the past, there were formerly $22 trillion across all trading strategies and asset classes piled into the short volatility trade.

Products and strategy designed to respond to low volatility prove to be effective tools as volatility increased. This is in no way to minimize the impact this had on investors, Tilly said, but to take a step back ad look at the broader market implications.

"Trading in our products was orderly and liquid, and they overall worked as designed," Tilley said.

Furthermore, he framed the selloff as "an opportunity to educate investors about how to trade volatility products."

"The period that we've been trading, 2018, has been marked by a trend toward investors putting on larger positions in these products, presumably because the short volatility trade has been profitable these past few years," Tilley said.

I think short vol has been around since options and derivatives were listed, and will continue to be an active strategy despite the events of this week.

After all, institutional traders have plenty of other options or shorting volatility, from buying put options to shorting long-VIX ETPs, some of which might find renewed interest.

In summary, the massive short-vol position has taken a massive hit - but its far from dead.

* * *

After a record-long streak without a 5% pullback in the S&P 500, the US equity markets lazy post-election boat ride was violently disrupted this week when a confluence of fears - including the showdown over the FISA memo, an optimistic average hourly wage number and anxieties about rising interest rates - sent markets spiraling lower, with the S&P 500 and the Dow recording their worst daily drop since August 2011, when Standard & Poor’s stripped the US of its AAA credit rating.

The violent moves have caused tremendous losses destroying inverse VIX ETPs in the process.

So with their stock tanking, the executives at CBOE are holding a phone call at 4:30 ET with journalists to explain how this is just a temporary speed bump, everything is still awesome and that retail investors who piled into those assets were aware of the risks they were taking.


Of the two major options exchanges, the Cboe is the most heavily dependent on selling products tied to the VIX - which it created.

A KBW report released this morning showed 20% to 25% of Cboe's revenues come from VIX-related products,  according to David Lutz of Jones Trading.

"The concerns are that this could impact CBOE’s VIX’s volumes," said Richard Ripetto, an analyst at Sandler O'Neill + Partners.

As we pointed out yesterday, Monday's historic VIX move has bascially destroyed an entire asset class: the inverse VIX ETN are no more, meaning retail investors no longer have a handy, convenient way to short volatility. Unfortunately, this means retail will simply short VIX ETNs like VXX, exposing themselves to unlimited downside risk - but hey, that's what natural selection is all about.

But while the short VIX ETN industry may have been eliminated, following several "termination events" for ETNs such as the XIV, it represented only $3 billion or so in assets; as such it is a small fraction of the total systematic vol sellers, including Risk Parity funds, CTAs, vol targeters, annuity funds and according to Fasanara Capital, everyone else, in what is one massive, $22 trillion, low-vol bet.

The VIX increased by 115% to 38.3 on Monday - its single biggest increase on record - while the S&P 500 dropped 4.1%.



eclectic syncretist khnum Wed, 02/07/2018 - 16:43 Permalink

It's gonna be a pre-emptive sweet talk about how "when this shit breaks, and we fuck everybody, you can't say we weren't nice about it beforehand, and we did everything possible to cover our asses so that we could get away with fucking you before the downturn came."

"After all, did you think the government or SEC or somebody was going to help or protect your pleb ass when the banksters came to steal your money?!!!! LOFL!"

Silver and gold: https://www.youtube.com/watch?v=rY-XDQN6ipE

In reply to by khnum

Yen Cross Wed, 02/07/2018 - 17:35 Permalink

  Is Douche Bank co-hosting the event?  They got toasted like a crispy-critter, and need moar 20 something boneheads to unload their crap on.

rbsx Wed, 02/07/2018 - 19:02 Permalink

I'm not entirely sure. In the interest of full disclosure, I lost money on the XIV when it went to zero. I knew the risks, shit happens.


What I disagree with though is the bullshittery of the chaos happening the moment the markets closed, when many people can't offload their shares. I'm a foreigner, our short vix ETF doesn't trade after hours. Didn't even have a chance to get out of it. It's almost as if there was a conspiratorial twist where someone wanted to fuck as many people as they could. 


That's what bothers me.