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A quick thing on the long-awaited, entirely predictable ‘Volpocalypse’

A quick thing on the long-awaited, entirely predictable ‘Volpocalypse’

How many warnings did buyers of XIV, the volatility-linked exchange-traded note (ETN) note that went bust last week get? A lot.

First there was the prospectus itself, which spelled out wipe-out risk fairly clearly. Then, there were multiple articles from multiple financial news and analysis outlets, myself included.

There were also tweets!

Like, lots of them!

The below tweet was from Jan. 31st — about five days before the actual blow-up! The only response I got to this at the time was from a guy complaining that he couldn’t see the x-axis so the chart was meaningless. That wasn’t the point! And if you don’t understand what a change in the shape of the VIX futures curve might mean for volatility-linked products, then you probably shouldn’t be trading them!

I tried to sum up just how telegraphed this was in a short note for our markets morning newsletter, which you can sign up for (for free) here.

I don’t mean this to sound callous to those who lost their shirts on this product, but neither do I want this to be spun as a failure on the part of forecasters and journalists etc. This was a well-telegraphed event that people saw a mile coming. That doesn’t mean there wasn’t failure somewhere. The fact that some retail investors seem to have been taken completely by surprise in the recent turn of events suggests they probably shouldn’t have been in these products in the first place. Whether that’s a failure on the part of the regulator, the ETN-issuer, the brokerages that enabled trading in the products, or some other party, I leave that to others to decide.

The End

The End

Is this the end? Are you my friend?
It seems to me, you ought to be free.
You used to be mine when the chips were down.
You used to be mine when I weren’t around…
The Doors.

Those immortal lyrics spring to mind courtesy of this Citi survey of investors:

I’ve been surprised by the suddenness with which markets appear to have shifted gears from an apparent six-year reliance on easy monetary policy to pinning their hopes on the expectation of fiscal stimulus that is still far from materializing. We’ve touched on it in our various coverage at Bloomberg but it seems this will be the theme to watch in 2017. How rapid is the tightening? How pervasive? And, crucially, can the market remain relatively resilient in the face of rising rates and investors who still have a massive long position on credit?

Speaking of which, as is becoming tradition around here, here’s this year’s list of credit coverage. You’ll notice it peters out as the year goes by. That’s because I got busy with a new home and some new work. See you in the new year and here’s hoping your 2017 be filled with all the right kind of surprises.

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The year in credit

The year in credit

Credit markets, I wrote a lot about them this year. One day some other asset class will grab my attention but for the time being it’s this. Sorry.

Here’s what I wrote about the market in 2015 – or at least, since starting the new gig over at Bloomberg in April. I may have missed a few here and there (and included some fixed income posts that I think are related to over-arching credit themes), but I think this is pretty much covers it.

Happy holidays, and may 2016 be filled with just the right amount of yield.

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It’s volatile all the way down…

It’s volatile all the way down…

shortgamma

The surge in volatility trading strategies and volatility-linked products is impacting volatility itself. I was tempted to break out the tail wagging the dog GIF again for this one, but I’ll keep it simple. Read the below, then read this, and this, and this, and so on.

Market volatility has changed immensely

On Aug. 24, as global markets fell precipitously, one thing was shooting up.

The Chicago Board Options Exchange’s Volatility Index, the VIX, briefly jumped to a level not seen since the depths of the financial crisis. Behind the scenes, however, its esoteric cousin, the VVIX, did one better.

For years, the VIX has been Wall Street’s go-to measure for expected stock market volatility. Derived from the price of options on the S&P 500-stock index, the volatility index has evolved into an asset class of its own and now acts as a benchmark for a host of futures, derivatives, and exchange-traded products to be enjoyed by both big, professional fund managers and mom and pop retail investors.

The dramatic events of last month underscore the degree to which the explosion in the popularity of volatility trading is now feeding on itself, creating booms and busts in implied volatility. Even as the VIX reached a post-crisis intraday high, the VVIX, which looks at the price of options on the VIX to gauge the implied volatility of the index itself, easily surpassed the levels it reached in 2008.

Analysts, investors, and traders point to two market developments that have arguably increased volatility in the world’s most famous volatility index, beginning with the rise of systematic strategies.

It’s a week after this was published and the Vix has since been collapsing after shooting up to that August 24 high.

Creating liquidity from illiquid stuff

Creating liquidity from illiquid stuff

A quick take on a long-running theme in markets, especially fixed-income.

Investors are reaching for a toolkit of exchange traded funds, mutual funds and credit derivatives to make up for a dearth of liquidity in parts of the financial system, according to market participants and research from Barclays.

Many have turned to ETFs, mutual funds and certain derivatives to make up for a lack of liquidity. ETFs use a network of banks and trading firms to give investors cheap and instant exposure to a wide variety of assets.

The trend is particularly pronounced in the fixed income market, where new rules aimed at increasing bank capital and reducing the risk of a run in the “repo market” — Ground Zero for the financial crisis — are said to have most hurt ease of trading.

Risks squeezed out of banks pop up elsewhere

 

The slow drip liquidity story – updated

The slow drip liquidity story – updated

Updated: October 17, 2014 given recent market events and sudden interest in all things liquidity-related. To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns.

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A by-no-means-extensive list of my work on the changing structure of the bond market.

Goldman eyes electronic bond trading (March, 2012)

Finance: Grinding to a halt (June, 2012)

Dealer and investor talks over liquidity fears (June, 2012)

Goldman launches bond trading platform (June, 2012)

Bond trading model shows signs of stress (October, 2012)

Banks tout idea of sharing bond data (November, 2012)

Slow-drip bond sell-off masks a problem (November, 2012)

Markets on edge as investors seek exit (June, 2013)

ETFs under scrutiny in markets turbulence (June, 2013)

Markets: the debt penalty (September, 2013)

Digging into dealer inventories (September, 2013)

Verizon’s $49bn bond sale whets appetite for larger issues (September, 2013)

ETFs: Tipped as liquidity source (November, 2013)

Global liquidity: Buyers struggle to find a safe landing (November, 2013)

Big US banks back new bond trade venue (November, 2013)

Investors turn to ‘shadow’ bond market (January, 2014)

Banks are a proxy for credit bubble fears (March, 2014)

Taper tremors fail to deter ETF investors (May, 2014)

Checking out of the ETF hotel could be costly (May, 2014)

‘Patient capital’ ready to exploit bond market sell-off (June, 2014)

Fed looks at exit fees on bond funds (June, 2014)

Bonfire of the bond funds (June 2014)

BlackRock’s Aladdin: Genie not included (July 2014)

Investors in junk bonds face a Matrix moment (August 2014)

Finance: The FICC and the dead (August 2014)

Investors dine on fresh menu of credit derivatives (August 2014)

Yield-hungry markets overlook credit risk (September 2014)

US corporate bond traders go electronic (September 2014)

Gross exit from Pimco tests bond market (September 2014)

Wall St sheds light on Bill Gross reign after Pimco departure (September 2014)

At the risk of sounding like a broken record, expect more on this.