Volatile stocks spark record one-day rise in fear index

Volatility, of course, is exactly what investors are getting as financial markets plunge for the second day in a row. One theory that's emerging: the curious case of the tail wagging the dog.

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

But these funds, though small, did help amplify the sell-off and the surge in volatility, in a sign that abnormal positioning in derivatives markets can have knock-on effects on the wider market.

"(It's) impossible to verify, but you'd have to figure that the recent move has caught many of these people off guard and has added some volatility to the recent moves", said Matt Thompson, co-head of the Volatility Group at Typhon Capital LLC in Chicago.

"The day started out fairly orderly, but somehow it took a turn for a worse, and then panic set in", Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. And market participants knew it.

Both the VIX and the VSTOXX have drifted lower since early 2016, staying at depressed levels below their 20-year average for almost two years - until Monday's slide in US stocks.

At the time of rolling over, they sold more expensive contacts and bought cheaper near dated contacts.

It was a theory echoed by Barclays Plc analysts in a research note published after Monday's sharp spike in the VIX.

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Too big to ignore, it's an asset class in its own right, with the might to push around the broader market. Including long-volatility funds, assets total more than $3 billion.

Monday's volatility shock in US stock markets had led to some misconceptions about the Cboe Volatility Index, known as the VIX.VIX, and related exchange-traded products (ETPs), Cboe's Tilly said. Beyond that is the options market, which itself is an implicit bet on swings in shares.

AQR, a hedge fund, says that so-called risk parity strategies alone hold about $70 billion in global equities. "If you're going to play the short-vol game, basically the goal is to just stay alive and avoid any circumstance where things can go up in smoke in minutes". The Swiss bank maintained that it hadn't suffered any trading losses as a result. That forum is now home to a host of horror stories from retail investors who lost almost everything and the hard lessons learned. The ProShares Short VIX Short-Term Futures resumed trading late Tuesday morning down 90 percent.

One silver lining to the crash: SVXY and XIV now lack the heft to roil markets, according to some. But effectively, any option is a bet on the volatility of the underlying asset.

As European markets sank on Tuesday, the region's equivalent to the VIX - the VSTOXX - followed suit with its biggest one-day surge since the September 11 attacks in 2001.

One day after the Cboe Volatility Index (VIX) saw its largest one-day increase ever―115.6%―Credit Suisse announced it would be shuttering its popular inverse VIX ETN.

Shares of the CBOE Global Markets Inc. The company didn't immediately respond to a request for comment. As of the date hereof, Credit Suisse will no longer issue new units of XIV ETN (see: all the Inverse Volatility ETFs here).

However, SocGen's Verastegui isn't sure it's that simple. While XIV potentially triggered an acceleration event (closure clause) according to its prospectus, trading in SVXY halted for some time. Vident Investment Advisory LLC acquired a new position in Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN during the third quarter worth $1,122,000.