A Tiny Hedge Fund Made 8,600% on a Vix Bet
bloomberg.com
bloomberg.com
The stock market engine has been hot for 5 - 6 years now and we just threw a can of nitro into the engine by way of massive tax cuts and deregulation. And then pundits and our President brag about how awesome this ride is as if managed growth is somehow anti-American. The retail investor masses heard that message and have arrived. The masses that don't know the difference between an income statement and balance sheet or how a market cap relates to the stock price. Historically they have been a catalyst of instability and trade solely based on the chart and trends.
So volatility seemed obvious two weeks ago. But when an obvious thought arises regarding the market two quotes always come to mind:
"Far more money has been lost anticipating the correction than in the correction itself". P. Lynch
"The first person you must not fool is yourself and you are the easiest person to fool". R. Feynman
The retail masses showed up many many years ago in the form of retirement accounts. And we’ve also benefited tremendously from this bull market. This last correction is nothing if you’ve been in the market for a few years.
Also I really doubt retail investors are the catalyst for anything here. Normal people don’t move a trillion dollars out of the market in a few minutes.
Sure they do. Robo-advisor services like Betterment have exploded over the past few years. They alone have over 10 billion under management right now. When everyone's money is following the same algorithms, it's natural to assume that any market movement will be magnified now.
The size and composition of the mass is often over-estimated, particularly w/respect to retirement accounts.[1] And they've mostly been sitting on the sidelines. Over all trading volume has been lower since the 08/09 crash, the retail side in particular. (Don't have access to the tool that tracks this anymore, but there are lots of articles/videos, etc... talking about this.)
>Also I really doubt retail investors are the catalyst for anything here.
Generally correct, but I caught an interview on CNBC the other day where the speaker said that retail flows accounted for 80% of the volume on one of the US exchanges for that day. So, sometimes retail investors can have an some impact on market movements.
*[1]: https://finance.yahoo.com/news/fewer-americans-retirement-ac...
Often they are executing lousier order prices than are available on other exchanges (the actual market.)
Other brokers, that make you pay for trades, send your order out to all exchanges.
Example: save $7 to end up paying 10 cents extra per share on 1000 shares. Looks like you actually got Robbedinhood for $93...
Other brokers take a fixed $7. Robinhood takes a percentage of your orders. Even for an order as small as $300, you can expect to get Robbedinhood for $7 or more (a couple percent.)
https://startupsventurecapital.com/robinhoods-exceptionally-...
The WSJ, marketwatch, cnbc, etc writes this every year. # of accounts, margin/debt exposure, etc. They also write how retail investors are missing out.
"As Dow Tops 25000, Individual Investors Sit It Out"
https://www.wsj.com/articles/as-dow-tops-25000-individual-in...
I wouldn't put too much stock in finance newspapers' headlines. They aren't there to give you advice. They exist to sell you ads.
> Historically they have been a catalyst of instability and trade solely based on the chart and trends.
This is not true. Retail investors don't move markets. Pension funds, hedge Funds, large investors do. And they do so when the FED decides to moves markets ( aka raise or lower interest rates ).
I used to make equity derivative markets. About thirty minutes after CNBC commented on something, a tsunami of stupid Charles Schwab order flow would hit our systems. It moved prices. Coördinated uninformed flows can dramatically move markets because markets are priced at the margin, not the bulk.
TL; DR If both institutions and retail are active in a name, the institutions will set the terms. But if institutions are inactive while retail is active, the latter can move markers surprisingly far.
By market, I was referring to the stock market. Also, are you claiming to be a market maker?
> About thirty minutes after CNBC said something about something, a tsunami of idiotic Charles Schwab and friends order flow would hit our systems. It absolutely moved prices.
It doesn't take 30 mins after the news breaks for stocks to move. And the move is usually orchestrated by the big boys and their algos. The herd can certainly follow the move of the big boys as they dump their shares on the late arriving retail investors. But the move is controlled by the big boys and of course the market makers as they tried to leech out as much off the spread as possible. Unless you are referring to lightly traded stocks or OTC stocks with no volume.
There isn't much retail trading derivatives. The derivative markets are almost exclusively dominated by hedge funds, banks, large investors.
I used to be a market maker of stock options, amongst other things.
> It doesn't take 30 mins after the news breaks for stocks to move
When it comes to markets, test every assumption. In reality, information diffusion is unpredictable and heterogenous [1]. This is due to, in part, the "effects of limited attention in at least part of the population of investors in the market, interacting with some more sophisticated investors with better access to information processing technologies" [2].
> The derivative markets are almost exclusively dominated by hedge funds, banks, large investors
Individual stock (versus index) options are actively traded by individual investors [3]. Individual investors also actively trade futures [4].
[1] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.652...
[2] https://pdfs.semanticscholar.org/b180/3e674cc6be4de275cda1aa...
[3] https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2013.184...
[4] https://www.sciencedirect.com/science/article/pii/S156601411...
If I were to do something like sell a put option on AAPL ($156.41 at the moment) would be $15641 into a single stock that I may have to put up. I'm closer to ~$5000 per trade as an individual, its not like I have as much money as those banks or hedge funds. In short: I'm only really able to buy and sell options on shares with $50 or lower prices. At least with my relatively conservative trading style.
But still, selling puts is a cool way to be "paid to be forced to buy a stock", and if you're worried about missing the upswing, you can always sell a put (at the money) + buy a call out of the money. Such a trade benefits from the volatility of the market, and is still strictly safer than owning the stock outright.
I mean, I'm a long-term buy-and-hold investor. Selling puts + buying a FOMO out-of-the-money call option is a really good trade most of the time. Given the tradeoffs and the decisions I've made on my portfolio. It basically allows me to benefit from market volatility.
The Options Clearing Corporation [1] actually has a solid set of introductory courses [2]. That said, I am very conservative about when I believe individual investors should be trading options. (With surplus investment capital, i.e. after tax-advantaged retirement accounts and liquidity reserves have been maxed out, and principally for purposes of hedging (versus leverage).
[1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation
Between weddings, funerals, car purchases, home purchases, major home renovations (new roof, new windows, etc. etc.), there are a lot of things that can be planned for 5 to 15 years out that probably should be properly invested. These lengths are long enough that sitting on cash is probably a bad idea, short enough that you need it before you can crack your retirement accounts.
Some of those things can be paid from your 401k or Roth IRA, but its a bad idea IMO to draw from your tax-advantaged retirement accounts in these cases.
A real world example: if you are beginning to look for a house and will likely need $70k+ for a good down payment, that would be the time to buy put-options to "lock in" your $70k.
You haven't found a house yet, but within 6 months or so, you'll likely need the money.
Without options, you'd basically be forced to sell your stocks ASAP, in case the market crashes and ruins your plans. But with a put-option, you negate all the downside risks, while retaining the ability to collect dividends and benefit from upward swings of the market. The put options allows you to confidently hold the stocks up until the week before closing (You'll still need time to transfer the money and generate a cashier's check, but you won't have to worry about market fluctuations)
For more "in depth" into some basic, conservative strategies, I suggest "The Rookie's Guide to Options", which is the book that I personally used to learn this stuff.
https://www.amazon.com/Rookies-Guide-Options-2nd-Beginners/d...
Its probably better to become intimately familiar with the "basic trades" (long call, short call, long put, and short put). Because at the end of the day, the more complicated strategies are just those four trades combined together.
One tidbit of "algebra" is to remember that "Long Call + Short Put == Virtual Stock". Sometimes written as Call - Put == Share. This formula really helps to break down the more complicated strategies (ie: Iron Condor which has 4 legs). It also helps you determine which strategies are roughly equivalent. (IE: Owning a share and selling a call == Share - Call is roughly equal to selling a put without owning a share.)
The Black Scholes model, aka "The Greeks", also seems important from a theoretical point of view. I've talked to some financial professionals and the pros consider Black-Scholes to be overly simplistic... but its still a model... and you need to have some basis to reality for why options have different prices. So know the model AND know the inherent weaknesses of the model (Volatility smiles and whatnot)
-------------------
One last tidbit: if you are going to trade options, be sure to find a brokerage which trades multiple legs in a single unit. You don't want to pay commission on every single leg of each option strategy.
E-Trade for instance allows you to straight up buy an Iron Condor on one commission.
Alternatively, I may want to own shares because I'm a buy-and-hold investor. An out-of-the-money call solves the FOMO problem.
The "risk" of a naked put is that you might be forced into buying shares. Well, that's fine. I'm a buy-and-hold, relatively conservative investor. I was planning on buying those shares anyway.
Looking at the AAPL options on yahoo finance, I can't find any puts that cost $156.41, even those in the money 2020 options.
How did you get selling a put cost same as the underlying share price?
I thought one of point of options pricing is you don't need to put up the same amount as owing the shares.
> How did you get selling a put cost same as the underlying share price?
1. Selling put options means you are PAID the price of the option.
2. You might be forced into buying those shares at that price at any time. Therefore, it would behoove you to have that much money in your account, "just in case". By selling an option, you've implicitly signed your name on a very powerful contract and your brokerage will do everything in its power to meet the terms of the options contract (including selling everything else in your account if necessary).
2.5 A Call option is the same thing, except slightly more dangerous in many cases. You are forced to sell those shares to someone else. So in the case of "selling naked calls", your brokerage will sell everything, then buy the stock (no matter what price that stock is at). Naked calls have infinite risk. In contrast, a naked put has a similar risk to buying 100 shares, so naked-puts are a good entry-point for learning the options market IMO.
3. Various options strategies can negate this possibility, but that's a bit more complicated. These more advanced strategies (ie: bear spreads, bull spreads, iron condors...) are a bit safer to play with, but are highly-levered.
> I thought one of point of options pricing is you don't need to put up the same amount as owing the shares.
That's called "leverage". I mean, play with it if you want, but if you really want excitement, there are lotto tickets and casinos. Casinos are great cause you pretty much get free drinks while you gamble.
I never touch naked options, From what you described
1. You get paid the price/premium for selling options (call/put).
2. Selling naked put
3. Selling naked call
Is that right?
I was thinking about debit/credit spreads options, so broker won't lock up $156.41 * 100 * X amount for the options period (e.g $15641 in your previous comment)
Ultimately, timing is everything. I can tell you markets will be X in Y time. Within reason, there's a good chance it will happen. Question is just "when?" The problem with strong views is whether they can be maintained. Being short in a rising market or long in a falling one can be painful. Markets have a way of wiping out your position (margin calls, psychological biases to losing money and exiting) longer than you can hold on.
In these guys' case, timing was even more important- because of options maturity dates. The article seems to allude to the fact that they rolled their position forward multiple times: "For about a year, Ibex had been buying options on the ProShares Short VIX Short-Term Futures ETF, ticker SVXY."
So the real question is how much money did they blow on premiums before the final trade did well?
I have funds to invest but every time I look into getting into I cannot bring myself to do it because I cannot stop my brain thinking it's gambling. Without insider knowledge I don't understand how I could beat the market short term. In terms of long term investing in an index fund or ETF, that supposedly is more sensible but that sort of feels like gambling too, in a way everything is I suppose, buying a house is too, but I suppose you have to just get your brain to get over it. There's no guarantee of anything.
They also have a fund explorer where you can easily look at past performance and compare: https://personal.vanguard.com/us/funds/snapshot?FundId=0970&...
Though this is probably not the best metric to use.
From Google Dictionary: (2) take risky action in the hope of a desired result.
This is my own conclusion as well. Well, either that or luck.
This goes double for long-term success. As the disclaimers say, past performance is no indication of future results.
Past performance is no guarantee of future performance, but it should absolutely be an indicator. Unless you view success in trading as a purely stochastic process, consistently beating the market is a strong signal that it can be done again in the future (by definition). If you do believe success in trading is a purely stochastic process, the disclaimer becomes moot in the “indicator” form or “guarantee” form because such a position is antithetical to trading in the first place.
To be more precise, if we're going to engage in deliberate trading at all, it's only productive to do so if we operate under the assumption that performance is random.
That's a smart conclusion that's correct in the vast majority of cases. Day trading, especially as a retail investor, is mostly gambling.
If you have funds to invest medium-to-long term, index investing using low cost, well-diversified funds really is the best thing you can do. Is it gambling? Year-over-year, an equity fund will certainly have wide swings up and down. However, since your horizon is long term, most people think that the market will be going up, averaged over the long term (a decade +). That is what the past has showed us.
While past results are not a guarantee of future performance, it would be highly surprising for the market as a whole to do down, or even stagnate, for a period of 10+ years. Yes, people often cite Japan, that's exactly why I stated well-diversified funds above: limiting yourself to a single country can be risky.
What is certain, is that if you are sitting on large sums of cash, inflation is eating away at it. You are actively losing money.
By large sums, I was mostly thinking 100k+
Or a Roth IRA for which th e contributions can be withdrawn tax-free and penalty-free at any time.
Saying with more effort I can do X and get Y always has the cost of that effort.
It's a dry book yet still one of the most recommended out there. There's a reason for that. You aren't going to learn the market in a day.
For the rational part: https://web.stanford.edu/~wfsharpe/art/active/active.htm
For the emotional part: http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
And if you need a good source for knowledge and ongoing support boggleheads is an amazing forum/site:
An example from the UK electra private equity ELTA was on a massive discount activist investors came in and I made over twice my initial investment in two month - I would have busted my yearly allowance for dividend income just on that stock alone.
I brought a commercial property fund when office prices crashed it tripled in less than 10 years.
And you should. The ultimate goal is to own a cap weighted proportion of all the assets in the world. If you do anything other than that you're taking an active bet that some assets will do well and some poorly and someone else is taking the other side of that bet. The sharpe article is quite revealing.
This is a false dichotomy.
First, just semantically speaking: investors "invest" in hedge funds that engage in speculation via trading strategies across a continuum of risk profiles. Hedge funds take their capital from "investors"; they typically have "Chief Investment Officers", and their traders execute trades in order to fulfill investment goals for clients according to fund-specific "investment mandates."
Second, by actual meaning: investing does not refer only to "value investing", which is substantially what you're referring to. Investors are, in the abstract, people who seek a positive return on their capital relative to another benchmark, where that benchmark is typically parameterized by risk, percentage return and liquidity. Trading is an activity in the service of investing, and a trading strategy is the execution of an investment thesis. The principles that allow for positive returns in value-based investing and index investing broadly generalize to other areas of investing, and essentially map to the concepts of arbitrage and (mis)priced assets in the abstract. Just as you can get invest your capital in real estate or young startups, you can invest your capital in trading strategies.
Whether or not it's wise to pursue a self-managed trading strategy (or seek others to manage one for you) is a completely separate topic; my point here is to emphasize that we're doing a conceptual disservice in education (and an abuse of well-accepted terminology) if we act as though trading and investing are different concepts. A much better way to frame your point here is to use terminology such as "passive investing" versus "active investing."
This is precisely the opposite of what I'm suggesting. Instead of implementing these trading strategies just buy the average of the market at low fees and don't trade anything.
>investing does not refer only to "value investing", which is substantially what you're referring to. Investors are, in the abstract, people who seek a positive return on their capital relative to another benchmark
Again a misrepresentation. I'm definitely not arguing you should be value investing or trying to get alpha by beating any benchmark. Quite the opposite. I'm arguing you should just hold the market average which requires no trading besides the initial purchases.
>if we act as though trading and investing are different concepts. A much better way to frame your point here is to use terminology such as "passive investing" versus "active investing."
I'm definitely arguing for passive investing but also in strategies that quite actively do not trade. Ultimately this is just splitting hairs on terminology but you'll be hard pressed to find the term "trading" in actual use for someone that just passively invests in the total market. I doubt you'll find anyone on bogleheads.org that will identify with the term. Trading is a term usually reserved for people who will actively trade in and out of various securities on a regular basis.
How is stocks not gambling? What exactly is being created here? It is just gambling and speculation, and for that these people (hedge funds especially) get paid insane salaries? And many times they gamble with someone else's money!!! This is incredible to my simple brain.
Stocks are risky. People don't like risk. So the current price of a stock will always be less than its expected future value. Therefore the value of the stock will tend to go up.
So when you own a stock you're being paid for bearing the risk. This is a real service of value that you're providing for the world.
Like Peter Lynch says, most people spend more time deciding on what refrigerator to buy than the stock they're buying. If you spent as much time researching a stock as you do a house, you'd probably do much better in the market.
Stop buying stocks only because someone told you to or because you like the company.
> Without insider knowledge I don't understand how I could beat the market short term.
Short term, you can't. You'll have to bank on luck. Hence why it is gambling. Especially if you go the options route. That's pure gambling as options are a zero sum game.
Binary bets absolutely are gambling, as I was told when I went to an interview with a big London spread betting company
Now let’s imagine that you have enough money to buy 4 houses in a city/location you want to live in for the long term. I would say that’s pretty low risk because your cost of living is going to be roughly the same as what you can earn by renting out your 4 houses. I.e. you’ll be able to live off your rental income forever.
Therefore there are investment strategies that aren’t equivalent to gambling.
After a year, you get used to the idea of a bet where you'll win some, lose some, but know on average you'll do better than OK.
Investing is gambling, but with an edge, since it's not a zero-sum game. Also you have to be patient, you are almost certainly not going to consistently beat the market short term, but you should do better long term than not investing.
If that's not for you, then just buy target date funds, balanced funds, structure your own balanced ETF portfolio, or pay a robo-advisor or human advisor to invest for you.
TFA's type of trade is like advantage gamblers who read the fine print of casino promotions looking for situations where they have an edge. Whoever sold that (presumably) OTC exotic bullet option (probably) didn't realize leveraged short vol funds forced to cover could create a vol-pocalypse. http://kiddynamitesworld.com/xiv-volpocalypse-sea-disinforma...
First you need to figure out what your investment horizon is. Microseconds or years? Or somewhere in between?
If you're good at programming there's a good chance you'll be attracted to the shorter time horizons (high frequency trading). At a longer time horizon your risks are different and so are the programming skills you need. Generally you'll need to be able to apply statistics and probability to what you're looking at. Look up Kelly criterion.
One of the best things to look at on any time horizon is liquidity differentials. Try to find two things that should be the same thing from a price or risk perspective, but trade with different volumes.
In the ETF space an example of this is the ETF versus it's basket. Or leaders and laggards within a specific sector.
If you have programming skill and a good understanding of statistics, do the following:
1. Identify a subset of equities in the total market which a) have fairly one dimensional revenue streams, b) have a market capitalization of at least ~$1-2B, and c) are not prone to extraordinary hype or tech-centric accounting, such that e.g. a "win" or a "loss" in an earnings announcement is fairly straightforward to understand (and therefore you can more easily, if not perfectly predict how the market will react).
2. Identify a strong, legal source of alternative data that maps directly to the revenue stream of one of these companies. The more difficult to find and collect, the better. Use your programming skills to automate the collection and curation of this dataset.
3. Incubate your dataset for a period of several months, then build it into a timeseries. Using the timeseries, build a model that forecasts the expected revenue of each particular company using historical 10-K and 10-Q documents.
4. For the companies whose data imply a jump in either direction that is very unexpected (according to e.g. the aggregate analyst consensus), take a contrarian position in the equity. If you're feeling very confident and have a higher risk tolerance, study options and take the corresponding derivative position.
5. In particular, establish a target win rate overall, a target tolerable drawdown period overall, and a target exit price (sufficient win or bearable loss) for each position, then follow it.
If you do this correctly and consistently, you will profit significantly and consistently enough that your system will be fully distinguishable from uninformed gambling. To equip you with a bit of meta-analysis here, this outline works because a) all trading strategies profit from finding opportunities to exploit pricing inefficiencies in various securities (or groups thereof), and b) the only way to deliberately identify those opportunities is by having information, access, or techniques that the broader market does not have yet (or else the price would reflect that information).
The great difficulty in this process is finding and analyzing the alternative data in the first place. As a fallback, if you're not confident you can build a trading strategy with this data you can also sell it to hedge funds, who will be very happy to buy it if it actually maps to revenue and is otherwise unknown.
Years ago I traded energy futures and we hired someone away from a rival. He knew a trick for seeing crude oil price changes on CME a few milliseconds before they sent the updates in their data feed. For a brief period we were printing money across the energy complex, but eventually it stopped working well. The guy who taught us the trick jumped from firm to firm, many others independently learned it, and it became the worst kept secret in trading: https://outline.com/MHp6Yu
If you've done this earnings forecasting yourself, how much size can you trade before the market moves enough to make the risk/reward unfavorable? For a retail guy it's probably not an issue, but curious if major funds are doing it at scale.
How does selling to hedge funds work when the information is valuable only insofar as few others have it? I suppose you could have an exclusivity contract but there's a strong incentive to sell to multiple buyers. Is it more of a relationship/reputation type setup? Are there brokers of some sort that help filter disreputable sellers out?
From my casual observations, usually about 8 figures or so. It was not unusual for us to deliver a particularly impactful report, then have institutional capital rush into it and push up the price fairly quickly. Then they’d hold that position for a month or so before earnings. Typically “word on the street” would be that the big movements signalled smart money, but usually there was still premium left over to capture during the actual earnings announcement. Humorously, it was sometimes frustrating when institutional money would make large bets in the direction opposite to our forecast, because despite being eventually vindicated, clients would get restless about it.
> How does selling to hedge funds work when the information is valuable only insofar as few others have it? I suppose you could have an exclusivity contract but there's a strong incentive to sell to multiple buyers. Is it more of a relationship/reputation type setup? Are there brokers of some sort that help filter disreputable sellers out?
It’s not typically the set of all hedge funds purchasing the data for any given equity (that is, unless it’s groundbreaking), it’s the subset of hedge funds which already have an interest in the particular equity. That limits the competition and information diffusion somewhat. For certain exceptionally high value data we did try exclusivity contracts so that its value would last longer. For example, before I left the research firm I was working at last year I developed (to my knowledge) the only non-drone, purely web-based method for forecasting the exact number and type of all vehicles Tesla produced with a <1% margin of error - to the point we knew well ahead of time that the Model 3s would completely miss. We were marketing that data to particularly long term, well known clients who could be trusted not to burn the utility of the information.
From there, it’s as you say: there is absolutely a reputation system with a strong basis in long term relationships. It was common to have to jump on calls directly with analysts at funds to talk through the forecast. And yes, there are brokers to help facilitate this entire process.
If you’d like to chat about this more, you’re welcome to email me. I can’t go into deeper detail for much of the proprietary workings, but I’m happy to talk about things that don’t have an NDA covering them.
Credit Suisse Fund Liquidated, ETFs Halted as Short-Vol Bets Die
https://www.bloomberg.com/news/articles/2018-02-06/credit-su...
https://www.cnbc.com/2018/02/06/the-obscure-volatility-secur...
https://www.cnbc.com/2018/02/05/xiv-exchange-traded-security...
I don't think it's accurate to say it "went bust". In fact, Credit Suisse had a (oft ignored) provision in the prospectus of the ETN that very clearly stated that they would liquidate and terminate the product if it exhibited certain behaviors.
Credit Suisse built the product "safely" in a way that did not expose them to losses. The "investors", however, who were almost certainly using the ETN incorrectly, were exposed to heavy losses:
https://www.zerohedge.com/news/2018-02-06/xiv-trader-loses-4...
"incorrectly", in this context, would be anything other than very, very short (less than one day) holding to hedge other risks.
What's interesting about this fund's particular bet isn't that they we're _right_ about the market but they correctly bet that the structural ability of the ETN/ETF product to properly hedge the risk associated with the fund goals was either too difficult or in certain events literally impossible. And that a certain event (like even what most would consider right now as a regular correction) would blow up said fund. In fact, even bastard cousins of the fund that are meant to do the exact opposite thing in these conditions may also feel the same deathknell (https://finance.google.com/finance?q=xiv).
And just to look a little deeper into the bet itself... They were using options (derivatives) on a fund (a derivative) using swaps (derivatives) linked to the VIX (a derivative) which is a measure of volatility of an index (a derivative) of the S&P components.
You too can replicate these winnings by just finding a niche mis-pricing on a derivative of a derivative of a derivative of a derivative of a derivative of a derivative!
Individual investors typically cannot access the right instruments (typically weirdly structured long term options). Typical institutional money managers cannot because their measurement typically penalizes continuous money loss. Lots of them however may have spotted the opportunity.
Options are derivatives.
Getting authorized for options trading on your account is pretty straight forward and serves as a last fair warning of how much money you're likely going to lose :)
EDIT: to clarify, most of the "exotic" stuff like VIX and XIV (was) are ETFs that are accessible by "regular" investors and hide away the complexities of properly structuring the underlying position to get the exposure to certain aspect of the market. This opaqueness is what makes them so dangerous IMO.
https://www.marketwatch.com/story/fidelity-prevents-retail-c...
Andrew Gelman once mentioned that Black Swan events are actually routinely _overpriced_ via the Longshot Bias. [1] He had talked about this in the context of the recent Leicester FC win and the odds on that team. [2]
The phrase I always heard and said is “we are picking up nickels in front of a steamroller” in reference to shorting implied Vol. Everyone knows this is bound to happen.
Although, the trick is that over a long enough time horizon implied volatility is higher than realized. People are unnaturally scared of movement in the market.
There are books published and read by almost all traders about this very event by Nick Taleb.
Over the past 2 years, they moved in tandem but opposite directions. But when $XIV crashed, $VXX didn't go back to the corresponding price.
The underlying index was up something like 90%. So VXX up 90% and XIV down 90%. Next day the index goes down 25% so VXX down 25% XIV up 25%. The two day returns for VXX will be 1.90 * .75 = 42% up and the two day returns for XIV will be 0.10 * 1.25 = 87.5% down. You can see how the daily tracking blows out the tracking over longer terms (just 2 days in this case). Since the VIX moves had been relatively small on a day to day basis, it sort of looked like they tracked each other on inverse terms over longer periods but it was just an illusion.
Having a Robinhood account I could not buy options, but I didn't know about the SVXY play anyways. Now I do, but who knows if SVXY will survive.
https://www.reuters.com/article/us-global-markets-volatility...
Indeed, many market participants are hedging their business operations, future production/consumption of physical commodities, etc.
So, when a speculator takes the opposite position of someone looking to hedge risk value is created for the hedger. Sure, it's not necessarily tangible, but it isn't nothing.
I work in it, it's a total waste of resources.
Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy?
Are they? What is the appropriate size of a nation's banking sector as a % of GDP (or whatever)? Who decides this?
This is still a free(ish) market. Anyone who can provide the same services/capture the same opportunities with fewer resources is rewarded.
https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
They use this privilege to capture all benefits of wealth creation via usury against land.
Just go outside. Why are banks like the new churches in the middle of the most expensive real-estate in the world? They are supposed to be the oil of real industry. The tail is wagging the dog.
You want them competing with each other. To win they have to make the tightest price before a competitor, which either lowers their margins or requires them to bring new information to the market sooner.
If you accept that markets require intermediaries to bridge liquidity gaps in time, place, and product, then high speed traders are far less wasteful than the firms they replaced. Consider this: In 2000 Goldman Sachs bought Spear, Leeds & Kellogg (SLK), a large NYSE dealer. SLK employed 2500 people and earned over a billion dollars annually. That's one firm on one exchange. Each market had thousands of men in jackets yelling at each other, making a much bigger spread on transactions, and giving less accurate pricing.
Today there are a couple thousand people involved in low latency trading across all markets/firms and the entire industry makes a few billion dollars a year. Teams with a handful of quant researchers make markets in every listed stock globally.
The majority of high speed traders are trading their own account and don't have customer orders to front run. If you prefer a loose definition of front running to mean something like "reacting to changes in the market faster than others" then yes, but I don't see anything problematic with using public data to make your prices more accurate faster.
If you believe markets operate well without intermediaries, there are block crossing services where institutional investors can try to match up with one another. I'm sure institutions would prefer trading that way, but it turns out finding someone trying to do the exact opposite trade at exactly the same time is very difficult--volume transacted on these systems is small.
Professional fund managers who want to insure against volatility can easily trade VIX futures or index options. They wouldn't use an ETP that can only replicate daily returns which erodes longer holding period returns, with high internal fees, daily roll costs, etc.
Same goes for other products like 3x inverse leveraged oil ETPs. The Southwests and Exxon Mobils of the world would never hedge with those. They'd go to ICE/CME or have a bank/energy producer write a bespoke forward contract.
The people trading these exotic products are the /r/wallstreetbets crowd. They're basically gambling instruments because of the amped up returns. They aren't suitable for the retail investor because they can't understand the mechanics, and professionals have better choices. Really no reason for these to exist, and I wouldn't be surprised to see more scrutiny after retail traders lost everything in inverse VIX this week.
Meanwhile XIV did the complete opposite. Because of the VIX futures term structure it was actually earning roll premium most days. That plus declining volatility caused its price to march steadily upward for almost two years. It looked safe and some people put lots of money in, even bought on margin. Then one day they lost 80-90% with much of the losses in after hours trading.
It's like the difference between a company having kinda crappy management that spends too much on executive perks vs. outright fraud like Enron. Sharp moves that wipe people out completely without warning will get outsized attention.
And 8600% isn't that impressive ( depending on the size of the bet ). Leveraged bets can turn $1K into $1M or $10M overnight.
If you want impressive, go look into the returns in currency trading when the swiss unpegged their franc a few years ago. If you had insider information, you could have turned a few thousands into tens of millions easily.
This is really only news if this tiny hedge fund had insider knowledge. There's nothing really newsworthy about this.