Stock Markets and Volatility: When the Tail Wags the Dog — and Yes, It Did

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Explaining volatility in the stock market is no simple process. To much of the investing public, stock market volatility just sounds like price gyrations. To professional investment managers, volatility is measured in multiple ways. Not all of those ways are going to sound all that good for the broader markets in general. And to add insult to injury, the economic fundamentals this week are just not all that different from the fundamentals of the prior week, after considering Friday’s wage inflation and Federal Reserve rate hike fears.

There are some similarities to the volatility trade and the “short volatility” trades actually creating moves in the underlying equity markets being similar to credit default swaps (CDS) ahead of and during the financial crisis of 2008 to 2009. It turns out that the tail can end up wagging the dog, if you consider that smaller trades and bets can create larger moves in the underlying securities.

24/7 Wall St. wanted to outline just how complicated the world of volatility and the “short volatility” can be. If it was simple, everyone would understand it. We have shown some of the exchange traded fund (ETF) and exchange traded note (ETN) products and have featured some of the key exchanges around the market rout. We also have outlined some strategic calls from analysts and advisories for those investors who are interested in looking through the mess to the other side.

Intercontinental Exchange Inc. (NYSE: ICE), which owns the New York Stock Exchange (NYSE) and many other exchanges, was last seen down just 1.3% at $70.50 right before noon Eastern Time on Tuesday. It was just on Monday that the ICE announced a record trading week for the NYSE FANG+TM Index futures contract. According to the NYSE Trader alerts page, the Proshares Short VIX Short-Term Futures ETF (SVXY) even had trading price adjustments and its shares were halted. The NYSE said:

NYSE Arca is adjusting the re-opening auction reference price for SVXY (ProShares Short VIX Short-Term Futures ETF) from the prior day’s official closing price to the Intraday Indicative Value (as of 11:00am) of $11.4111. As a result, the lower and upper re-opening auction collars will be $10.84 and $11.98 respectively.

Shares of the CBOE Global Markets Inc. (NASDAQ: CBOE), which of course operates markets for many of the options that trade hands, was last seen down 11.4% at $115.65 on more than four times normal volume of 4.3 million shares as of noon Eastern Time. The CBOE has a video explaining some of Monday’s VIX trading activity.

Virtu Financial Inc. (NASDAQ: VIRT) had its CEO speak on CNBC after the close of trading on Monday noting that an avalanche of sell orders that came in around 3:00 p.m. were the cause of the massive sell-off rather than the computers. Their take was that the market computers functioned normally from the high-speed trading firm. They saw no busted trades and no repricing. That CNBC video can be seen here.

Credit Suisse announced the event acceleration of its XIV ETNs on Tuesday morning. The SEC filing signals the end of the ETN:

Because the intraday indicative value of XIV on February 5, 2018 was equal to or less than twenty percent of the prior day’s closing indicative value, an acceleration event has occurred. Credit Suisse expects to deliver an irrevocable call notice with respect to the event acceleration of XIV to The Depository Trust Company no later than February 15, 2018. The date of the delivery of the irrevocable call notice, which is expected to be February 15, 2018, will constitute the accelerated valuation date, subject to postponement due to certain events. The acceleration date for XIV is expected to be February 21, 2018, which is three business days after the accelerated valuation date. On the acceleration date, investors will receive a cash payment per ETN in an amount equal to the closing indicative value of XIV on the accelerated valuation date. The last day of trading for XIV is expected to be February 20, 2018. As of the date hereof, Credit Suisse will no longer issue new units of XIV ETNs.