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Cboe Global Markets To Host Call On Recent Market Chaos

Courtesy of ZeroHedge. View original post here.

After a record-long streak without a 5% pullback in the S&P 500, the US equity markets lazy post-election boat ride was violently disrupted this week when a confluence of fears – including the showdown over the FISA memo, an optimistic average hourly wage number and anxieties about rising interest rates – sent markets spiraling lower, with the S&P 500 and the Dow recording their worst daily drop since August 2011, when Standard & Poor’s stripped the US of its AAA credit rating.

The violent moves have caused tremendous losses destroying inverse VIX ETPs in the process.

So with their stock tanking, the executives at CBOE are holding a phone call at 4:30 ET with journalists to explain how this is just a temporary speed bump, everything is still awesome and that retail investors who piled into those assets were aware of the risks they were taking.

Cboe

Of the two major options exchanges, the Cboe is the most heavily dependent on selling products tied to the VIX – which it created.

A KBW report released this morning showed 20% to 25% of Cboe’s revenues come from VIX-related products,  according to David Lutz of Jones Trading.

“The concerns are that this could impact CBOE’s VIX’s volumes,” said Richard Ripetto, an analyst at Sandler O’Neill + Partners.

As we pointed out yesterday, Monday’s historic VIX move has bascially destroyed an entire asset class: the inverse VIX ETN are no more, meaning retail investors no longer have a handy, convenient way to short volatility. Unfortunately, this means retail will simply short VIX ETNs like VXX, exposing themselves to unlimited downside risk – but hey, that’s what natural selection is all about.

But while the short VIX ETN industry may have been eliminated, following several “termination events” for ETNs such as the XIV, it represented only $3 billion or so in assets; as such it is a small fraction of the total systematic vol sellers, including Risk Parity funds, CTAs, vol targeters, annuity funds and according to Fasanara Capital, everyone else, in what is one massive, $22 trillion, low-vol bet.

The VIX increased by 115% to 38.3 on Monday while the S&P 500 dropped 4.1%.


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