And we were not buying it:
Today's action didn't look like CTA's, the whipsaws were too quick, it looked more like volatility sellers getting adjusted on the fly.ZH has returned with a couple posts that make more sense than the Goldilocks story from Blankfein & Cie.
First up the headline story:
By Charlie McElligott, managing director of cross-asset strategy at Nomura.
Fade to BlackAnd:
The “grey swan” we all have spoken about for years—that being the absurd “tail wagging the dog” potential of VIX ETN market structure (inverse and leveraged products) AND the massive growth in “negative convexity” / “vol target” / “vol rebalancing” strategies to either generate extra income or “systematically allocate risk” (looks good in the prospectus, right?!) –finally “broke” the volatility market, and has now bled-through to the “underlying” spot equities market…as the short vol trade went “lights out.”
The ETNs are the “patient zero” of this current market meltdown. It is estimated that there was anywhere from ~$125mm to $200mm of vega / VIX futs to BUY on the close from the two main “short VIX” ETNs that rebalance daily (XIV and SVXY). As S&P traded -50 handles AFTER the cash close from 4:00pm to 4:15pm into the market’s anticipation of the massive rebalancing of volatility (buy to cover) on the close, XIV then saw a delayed and terrifying ~-87 PERCENT move after the close, as some who owned XIV puts as crash protection sniffed this potential and speculated liquidation from the ETN, which is set per a rules-based system to buy back short vega after an 80% “crash trigger”(which again isn’t a certainty because they use a blend of 1st and 2nd month). The asset pool nonetheless was seemingly / largely wiped-out and the note is guaranteed to “pay out” to their shareholders as set per their prospectus. It is likely that this thing has indeed been “triggered” and will be forced to liquidate. SVXY doesn’t have the firm 80% “trigger” but too is seeing its NAV “wiped out” and is trading ~-80% post-close as well.
The issue NOW is the pile-on going-forward across assets, as the systematic “short vol” community’s models are now completely toast, and they too will be forced to cover remaining “short vol” positions that didn’t trade today—i.e. BE PREPARED FOR A MAJOR VIX FOLLOW-THROUGH TOMORROW. ...MORE
"Termination Event" Arrives: Traders Panic As XIV Disintegrates -90% After The Close
Today's market turmoil has left more questions than answers.So tomorrow, while working on peace in the Middle East or sustainable ag in the Sahel or something, we'll also be keeping an eye open for slow but significant CTA rebalancing action and more short vol positions exploding.
“What was frightening was the speed at which the market tanked,” said Walter “Bucky” Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management, who helps oversee about $17 billion.Some tried to blame it on a fat-finger or 'machines', but in this case it was not the normal cuprits per se...
“The drop in the morning was caused by humans, but the free-fall in the afternoon was caused by the machines. It brought back the same reaction that we had in 2010, which was ‘What the heck is going on here?”
"There was not a single self-help; there were no outs; there were no fat fingers that we saw,” Doug Cifu, CEO of high-speed trading firm Virtu, told CNBC.But while we noted earlier that US equity futures were extending losses after the close, but the real panic action is in the volatility complex....MORE
“There were no busted trades, no repricing. It was just an avalanche of orders around 3 o’clock-ish.”
And for grins and giggles here's a post from last October's 30th anniversary of Black Monday. 1987:
"Will Short Volatility Trigger the Next Black Monday?"
