Another of the blogs we read but don't link to often enough.
From Six Figure Investing:
The VIX Futures market has been on a bit of a tear—driven by inflows into volatility ETFs like Barclays’ VXX, VelocityShares’ XIV and TVIX, and ProShares’ UVXY. The chart below shows the resultant growth in the short term futures open interest and volume.
Open Interest and Volume on Short Term VIX futures
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The data doesn’t look as dramatic if we change the vertical axis to a
logarithmic scale—a scale that makes it easier to see if the rate of
growth is changing. The chart below shows the short term VIX futures
growth in open interest from the beginning of trading in 2004 compared
to the VIX index.
Open Interest using logarithmic scale
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The open interest has doubled pretty consistently every year and a
half since inception, and doesn’t show any signs of slowing down. In
the early years institutions drove growth, but the current growth in VIX
futures is dominated by the volatility ETFs.
The largest, Barclays’ VXX with $1.8 billion in assets under
management, only needs to grow another 15% to become one of the top 100
biggest ETFs.
What will happen as the demand for volatility increases?
When demand for a physical commodity like gold increases the price
goes up. The increased price helps satisfy that demand in two ways:
current owners sell their holding to take their profits, and producers
are motivated to obtain/make more of it. If the price increases enough
previously uneconomic sources (e.g., lower grade ores) might become
profitable. On the other hand, increased production might strain the
ability of suppliers to provide required materials and create supply
disruptions and price increases in other areas.
Even though volatility can’t be eaten, alloyed, burned, or worn the
same thing happens when demand goes up. The price increases, some
holders sell, and producers (futures market makers in this case) make
more of it. In some cases historic price relationships might start
changing....MORE
