Volatile stocks spark record one-day rise in fear index

ETrade Bans Margin Trading on Volatility ETF as Swings Increase

The spike in volatility caused investors to flee the VelocityShares note en masse.

World stock markets nose-dived again on Tuesday amid concerns about a bond market sell-off and rising inflation. "I was up until the wee hours, checking my phone to see where VIX futures were trading". "If the price of the underlying futures contracts increases by more than 80% in a day, it is extremely likely that the Inverse ETNs will depreciate to an Intraday Indicative Value or Closing Indicative Value equal to or less than 20% of the prior day's Closing Indicative Value and will be subject to acceleration".

The Final Word: Volatility has returned in a big way, leaving many traders exposed to systemic risk.

The decimation of these products potentially removes one avenue for volatility spikes, as their rebalancing needs are a function of their assets and the move in VIX futures.

With day-to-day trading volumes dented by the lower market volatility, banks created products to turn the generally calm market environment into a trading opportunity. Investors may use the 200-day MA to help smooth out the data a get a clearer long-term picture.

Because many of these products were sold on stock exchanges as exchange-traded funds (ETFs) or exchange-traded notes (ETNs), retail investors had easier access than before to these highly leveraged trades which were winners for months. (The VIX tends to move in the opposite direction of US stocks.) Such products typically buy VIX futures as the index rises and sell them as it falls as they seek to maintain a constant degree of exposure to the underlying index.

Yet the popularity of these vehicles might have contributed to one of the most violent moves in US equities in history: one that saw the Dow Jones Industrial Average slump more than 6 percent in a span of six minutes. Bets against volatility had doubled in 2017.

Normally, one-month futures contracts on the VIX trade at a discount to the spot price, a structure known as backwardation.

And while high-frequency trading does often exacerbate volatile markets, Themis Trading's Arnuk said this week's turmoil didn't begin there. So when volatility spiked by a record 116% on Monday, the funds plummeted.

Meanwhile, ProShares will continue to operate SVXY, which is structured as an ETF.

The VIX has drifted lower since early 2016, staying at depressed levels below its 20-year average for almost two years with spikes only a handful of times in the last decade.

The repercussions have been severe for some funds.

Between the VelocityShares Daily Inverse VIX Short-Term ETN and ProShares Short VIX Short-Term Futures ETF (NYSEMKT:SVXY), as much as $3 billion of investors' wealth could have simply evaporated in a single day of trading thanks to a massive, one-day surge in the VIX.

As Benzinga reported Tuesday, XIV was halted Tuesday, and Credit Suisse subsequently issued a press release saying it will be delivering an irrevocable call notice to The Depository Trust Company for the XIV on February 15. Other exchange traded securities that bet on volatility were also halted on Tuesday after losing most of their value overnight.

The liquidation of the two products, which had about $2.8 billion in assets under management as of last week, is bound to have an effect on not only the VIX markets, but also on the broader markets, Aniston said.

Several risky funds that reward investors when the markets are quiet imploded in the global market rout.

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