Volatility futures may be subdued because of all the volatility ETPs

Volatility futures may be subdued because of all the volatility ETPs
Cboe Volatility Index futures have been quiet recently as U.S. stocks reached new highs.
DEC 02, 2019
By  Bloomberg
Exchange-traded products are taking up a bigger chunk of Cboe Volatility Index futures trading than they have in about seven years, and that could be depressing the gauge, according to Nomura Securities International Inc. When VIX-linked ETPs roll to the next month, they sell front-month futures on the volatility gauge to buy second-month ones. And when that activity becomes a larger portion of overall futures trading, it could have a bigger influence on the level of the index itself. [Recommended video: How will the markets react to news about the White House?]​ The current impact of ETP rebalancing on the front VIX future is about 20% of daily volume on the index's contracts, "just smashing the VIX future," according to Nomura Cross-Asset Strategist Charlie McElligott. "In a market structure where volatility is your exposure and/or leverage toggle, this creates that second-order signal to lever up/increase exposure to the asset for many volatility control, target volatility, Commodity Trading Advisers trend and risk-parity products," Mr. McElligott wrote in an email last Wednesday. [More: SEC commissioner warns about use of leverage in ETFs] The VIX has been quiet recently — it hasn't closed above 15 in seven weeks — as American stocks reach new highs amid optimism on U.S.-China trade talks, global economic health and support from dovish central banks. "One final booster shot to this is that the ETN monthly rebalancing via the futures roll also creates an enormous steepening between the first and second contract, which is then a signal for systematic roll-down strategies to also pile on and short the front end of the VIX futures curve," Mr. McElligott said. The result: "Underlying equities slingshot higher." [More: New ETF offers a way to bet on credit volatility]

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.