The Derivative - $TVIX gets Terminated – What^%$#

Episode Date: June 25, 2020

Similar to how we quickly grabbed some experts to discuss Crude Oil going negative, we grabbed some VIX experts as soon as the news hit this week that Credit Suisse was pulling the plug on one of the biggest VIX tracking exchange traded products. What will this do to VIX futures volume, liquidity, and the curve. What does this mean for traders and firms using these VIX products to tweak their exposure. Our guests today are two of our favorite VIX twitter follows Jim Carroll and Patrick Hennessy. In this episode, we’re talking about the differences between ETPs, ETFs, and ETNs, what Credit Suisse was probably thinking (Hint: RISK), how VIX futures will react, and who are the players that might fill this void. Follow along with: Jim Carroll on Twitter Pat Hennessy on Twitter Don’t forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Bottom line is that if that exposure doesn't get rolled over into VXX or into UVXY, you know, you're basically going to have an imbalance of supply and demand within the market. You know, you're going to have a lot of long volatility that needs to get liquidated. And presumably, if it doesn't all move over, you're not going to have a bid for that volatility.

And so it's possible that you could see a down move in the VIX products and in the VIX futures, the front month VIX futures, due to this kind of mismatch if all the AUM does not roll over. Hi, welcome back everyone to The Derivative. I'm your host Jeff Malek and we're doing another one of our emergency type pods. We really need a new name for that. Tide Pod or Quickie or something like that. But last time we got on here was some experts when oil went negative. And this week with the news that Credit Suisse was delisting their VIX ETNs, the most popular of which is the TVIX. Wanted to get on two of our favorite VIX Twitter follows, Jim Carroll of the handle at VIXologist and Patrick Hennessey at Pat underscore Hennessey talking about the TVIX and this delisting.

So thanks for coming on, guys. Thanks for having me. Yeah. And so, uh, Pat, you're out in the Denver area and Jim, you're in an undisclosed location in South Carolina. I got to ask quick, Pat, what's there's, is there a monkey being hung behind your, over your right shoulder? What's going on there? Uh, it looks like there is, it's actually aer swim monkey that I guess I've been here for, I don't know how long, but yeah, it's joining us in the podcast today. He's a good luck charm.

Why do I keep saying Jim to Pat? Sorry, I keep screwing up. Jim, what are some of the best books you got on the back of your bookshelf there? I don't know. I haven't read any of them. I see peak performance. I haven't read any of them. I see peak performance. I like that. That's Van Tharp.

So yeah. So Jim, while you're there, you're Senior Vice President and Portfolio Manager at Toroso Investments. Can you give us a quick elevator pitch on what you're doing and how you got there? Sure. I joined Toroso last year, just a little over

a year ago. I had my own shingle for the better part of 15 years and met the Toroso crew. And there are three legs to our business. One is a more or less traditional wealth advisory business. We have an investment management business that's focused on ETF managed strategies. And we have a third leg, which is a consulting business, primarily helping people to form and launch and get initial distribution for exchange traded funds. Probably the most high profile, the risk parity ETF that was launched maybe six months ago. I think it's RPAR. And SoFi has launched some ETFs that we assisted them with.

So that's become a nice business for us. Total AUA and AUM aggregate to about $2.8 billion right now. And within that, I sort of straddle the investment management and wealth advisory side with some systematic strategies, including one that looks at the volatility space. Pat, you're head trader and lead the trading team at IPS. Can you give us a quick little background on what's going on there? Sure. IPS Strategic Capital is an independent RIA based out here in Denver. We've been in business since 1993. We specialize in managing hedged equity type solutions. We have a 40-act fund and we have a variety of SMA based products that the end goal is

really to provide our clients with equity like upside without taking all of the risk on the downside I love it and so let's talk let's get right into this Credit Suisse decision so first let's just go through the facts. Who can run down the facts of what's happening for us briefly? I could do that if you'd like. Velocity share, Credit Suisse was the issuer on nine exchange traded notes sponsored by Velocity shares, three of which were in the vol space, TVIX being the best known and largest. They also had a VXX-like product called VIIX, and then a midterm structure note, which was ZIV, which was an inverse in the four to seven month range then there were several metals some gold and silver as well as some nat gas so in total it was seven etns the credit

suisse was the node issue were four that they pulled the rug out from under. Looking at the numbers, in the aggregate, it was about $2.6 billion of AUM across the nine. 50% of that was involved, and 46% of the total was TVIX. So TVIX was clearly the major player here. And I'll just add quickly, I read on ETF.com or ETF database, one of those that it's the largest ever ETF to basically delist. Right, I think Eric Balkunis from Bloomberg made the same comment.

And what's interesting is that it's about 1.2 billion right now, maybe a little less today because the ball got smashed a little bit. You know, at the height of the action back in March, it got up as high as $1,000 per share. And that represented about $8.4 billion in AUM. So it's shrunk a little bit from its peak, but still at $1.2 billion, it's large, certainly the largest of the ETNs in the vol space. And mind you, that was 2X. So you're talking about a lot of assets that were allocated to VIX futures at the time. Yeah, so remind us of that. So TVIX is a 2X product.

Correct. So it looks to replicate the performance of the S&P 500 VIX futures index, which effectively takes a position in a constant maturity 30-day future. And what it's doing is it's attempting to replicate that performance on a daily basis. And it wants to give the investors two times the return of that index. So meaning if that 30 day VIX maturity goes up 5%, it wants to return 10% and vice versa on the downside. So when you're dealing with a leveraged product, there's obviously some nuances that I'm sure your listeners are quite familiar with. And I'm sure we can get into some of that stuff later on in the conversation but it was uh and it so and i didn't know actually reading through it so it's on all those etns

and it's is it all of velocity shares etns yes uh no they've got a couple of currency etns but it is the certainly the bulk of velocity shares lineup Shares lineup. Velocity Shares is part of Janus. They were acquired by Janus several years ago. So, I mean, we can get into it, but, you know, one of the possibilities is that Velocity Shares would look for another major bank to become the underwriter of notes for these exchange traded products. Well, let's dive into that now. So I think people conflate, right? ETN, ETP, ETF. So an ETP, exchange traded product, consists of ETNs and ETFs. I think the public's way more familiar with ETFs, exchange traded fund, which is essentially a mutual fund, which trades intraday for a very simplistic version. An ETN, does one of you want to jump on the grenade and take what an ETN is and the difference there?

I'll jump on that grenade. Go ahead. So an ETn is an exchange traded note um and effectively what it is is it's a piece of unsecured debt that effectively is on a bank's balance sheet um so some of the nuances that an etn has when you compare it to something like an etf an etf would actually own inside of that product wrapper the underlying holdings of whatever they're trading. So, for example, the SPY, everyone knows what that is. It owns the 505 or so companies that comprise the S&P 500 index. With something like TBIX, which is an ETN, a bank such as Credit Suisse would go out there and effectively guarantee mathematically the performance of whatever the underlying index is and guarantee that return to its

investors on a daily basis. I don't know if we want to go into this quite yet, but since they don't have to own the underlying instruments, there's a whole side of that business where Credit Suisse is effectively responsible for hedging that product because it sits on their books as they see fit, which as we'll get into is something that can have a large effect on the way that the fixed futures and even the S&P 500 options market trades on a day-to-day basis. And the purpose of an ETN is to essentially hide the derivatives. Would that be fair to say? Because you can't necessarily trade the derivatives direct in an ETF.

So they can do it inside of a note. Then you're buying a note, you're buying a security instead of playing directly in the derivatives. Sure. Yeah. And I think the ultimate, you know, goal of the product is to provide investors with what actually is an extremely complicated exposure to already complex instruments. You know, I would imagine that, you know, most of the retail traders that are trading the product don't necessarily understand all of the intricacies of how an ETN actually works. But, you know, one of the primary differences between an ETN and ETF is that an ETN actually has credit risk facing the issuer of that note. And so, you know, one point

that I'll get into later is when TVIX ballooned to the size that it got in March of 2020, you were looking at a product that, you know, had a market cap that was almost 50% of the market cap of Credit Suisse at the time. So the credit risk in these can also not be understated, especially in times of stress like we saw in March. What did it start at? Do we know? Like in February, end of February or something, before the big spike down happened, what was its assets at?

I think it was around a billion. I'd have to look at that. Yeah, I actually looked at those numbers. And I'll just, while you're looking at that, so that there can be a bit of the tail wagging the dog there, right? So Credit Suisse, as the guarantor of this note, as the VIX is rallying, they have to buy more VIX futures to produce the return that they're guaranteeing for their hedge, right? so it can drive up the price of

the thing that people are tracking. So when are these all coming off the board let's get into that a little bit before we go back to some of So they're delisting, they're suspending, let me find the exact dates. Basically, the beginning of July, they will stop creations and move to delist TVIX. So it will no longer trade the way it's been trading on the board and authorized participants will no longer be able to create new shares, which is part of the process that historically has kept the market price in line with the net asset value. I mean, that is part of the creation redemption process that helps keep prices in line.

TIVX over the years, and XIV had some of the same problem from time to time, has been notorious for diverging from NAV, for the most part, trading at a premium to NAV. And if you go back to 2012, there was a period where Credit Suisse stopped creations on TBIX. And the market price got to a point where it was almost double the NAV before they opened the creation window. And the effect of that at the time was, surprise, surprise, that the market price crashed back to NAV because people could get in and short it effectively. And so, you know, the combination of delisting and halting creations, who knows how this thing is going to trade, you know, post July 3rd. It will be over the counter. I expect it will probably be relatively thin. And I certainly wouldn't want to be a holder of it

once it's delisted. Yeah. And I read right before we came on that interactive brokers stopped accepting new trades in it. I'm assuming new long trades, but maybe both sides. And so how does that work? If you're holding it, you sell it, you get your money back. So you could hold it as long as you want. And in theory, it's trading over the counter. It's trading on the pink sheets or blue sheets, whatever they're called these days. And, um, and you get your money back, right? Well, you could get some money back. It might not be, um, net asset value. Yeah. Or the bid offer might be, could drive a truck. This thing, this thing could move from trading at a premium

yesterday the premium got up as high as i think eight percent um over nav and um you know you could find yourself selling it at a discount to nav and you know so that's interesting you have you have like a week here where as you were saying back in 2012 when they stopped creation it builds the premium because there's more demand than there's supply so you have that for a week here where as you were saying back in 2012 when they stopped creation it builds the premium because there's more demand than there's supply so you have that for a week but then the flip side of that there's going to be uh potentially no demand because there's no supply yeah and and i think this this is not going to play out the way 2012 played out um i don't believe because, you know, I don't see where anybody, unless Dave Portnoy decides he wants to buy Teavex this week, I just don't see where there's going to be a lot of demand,

a lot of new demand. As you point out, I wouldn't be surprised if some of the other brokerage houses put a halt on new purchases. So, you know, the alternative for people who, you know, continue to hold it through the delisting would be there is an early redemption mechanism where you will be able to submit your shares to Credit Suisse for redemption at NAV less an early redemption fee of half a percent. How cumbersome that turns out to be is a question that Dave Nadeg raised in his blog post. Although he did buy one share of TVIX, which is the minimum required to submit for early redemption so that he can go through the process and tell us about it on the back end. Right. See how it works.

And so the coming back to the different players here. So Velocity Shares runs the strategy, so to speak. Credit Suisse is the issuer and the guarantor. Yes. As the, because it's the ETN. So that's always going to be the same thing in the case of an ETN. Yeah. I would put some, I would probably put some parens around guarantor. Yeah. Yeah. Yeah. Yeah. Well, XIV is proof of that, right? They'll just shut it down before they have to guarantee anything. Right.

And XIV was a velocity shared product right correct so this isn't my first rodeo and uh one other thing to to point out that when i was looking into this is that there is no requirement for the holders of this to sell the note um you know credit suisse is still on the hook to guarantee the payout of the note until the note matures. You know, as I'm sure everyone has seen the long-term chart of TVIX, both short and long vol ETPs say very clearly in the prospectus, the long-term expected value of these is zero. So, you know, you'd have to be crazy to want to hold this thing through, but technically you could hold it in your account. Although that would not be something that, you know, would be recommendable. But it is something that, you know,

if a client doesn't look at their account and they don't really know about what's going on, they can end up owning TVIX through this event. And, you know, so it's good that you're getting information out there and trying to educate the masses on this. I would imagine that we would see some of the AUM that has been allocated to TVIX to move into some other similar products like VXX and UBXY, which are, you know, probably the most comparable that are out there so you know that that's something that

we're definitely keeping a very close eye on here over the next you know week or so to see how that migration from TVIX to those two ETPs plays out. And those are ETFs? The VXX is an ETN and UVXY is actually an ETP that holds the underlying futures. So you can you know you can actually go in there and see the amount of futures that they hold at the end of the day on the ProShares website. VXX is an ETN similar to TVIX where that one is actually issued by Barclays and it operates in effectively the same way. The main difference being that VXX provides one times, so 1X exposure while TVIX provides 2X. That's iShares product? Yep. Yeah, iPath. It's an iPath. iPath.

It's an integrated node, yeah. iShares, iP Yeah. Why wouldn't they have just done a deal with one of those guys? Or it's too messy to have transferred the assets or whatnot? Velocity shares? Yeah. Or credit to me to say, hey, we're just going to hand this over to you, Barclays, and merge in the assets. Well, I'm guessing, and it's pure speculation, that somebody had a conversation, probably the Velocity Shares folks had a conversation with somebody on that side to see whether Barclays might be interested. See, you've already got the 1x, why not add the 2x? Apparently, if there's interest, it has not manifested itself yet. Right, so what do we think this 1.4 billion is gonna, how much of it will go into these two

products you think? Well you know on day one right this announcement came out yesterday morning and through the end of the day yesterday if you look at the number of notes outstanding for VXX Friday versus close yesterday, they picked up, I think it was about $240 million. So they went from $780 million, call it, call it to a billion twenty in one day. So there was a migration to VXX, how much of that was related to TBIX, good question, hard to know. And there really was just a very tiny increase in shares outstanding for UVIXY yesterday. So, you know, it's probably early, but the early leader in terms of migration would look to be VXX. You know, we'll see. Yeah. And so let's talk if that volume doesn't go over one to one.

What do you see this doing for the VIX curve, if anything, the volume, the liquidity in the futures? What are your general thoughts on what microstructure, market structure impacts this lab? Well, I think one of the immediate effects that you could see is, you know, I mean, right now there was, I think Jim said 1.1 billion as of yesterday in TVIX. You know, presumably a lot of that exposure that is issued is, you know, being hedged. So a corresponding short, you know, a short volatility position, you know, against that exposure. But the bottom line is that if that exposure doesn't get rolled over into VXX or into UVXY, you know, you're basically going to have an imbalance of supply and demand within the market. You know, you're going to have a lot of long volatility that needs to get liquidated. And presumably, you know, if it doesn't all move over,

you're not going to have a bid for that volatility. And so it's possible that you could see, you know, a down move in the VIX products and in the VIX future, the front month VIX futures due to this kind of mismatch, if all the AUM does not roll over. Or just like a wider market too, right? If you're trying to sell VIX, the market makers might push that out a little bit. Sure, absolutely.

And it's interesting to note that of the VIX ETP landscape, TVIX makes up over 50% of the AUM within all of the VIX ETP products. Yeah, it's a very large amount when you include both long and short. The short side, in fairness, since the demise of XIV, the short side has been grossly underrepresented because all you really had left was SVXY at 0.5 inverse. Yeah, halved itself. Yeah, and so, you know, I think more sophisticated users, more sophisticated participants in this market have gone to the short side

of the long products. Yeah. You know, shorting BXX for those with. Nerves of steel. There you go. Nerves of steel. Yeah. Shorting T-Vix.

No, thanks. Or UVixi. Yeah. You know, I think another effect that you could end up seeing is, you know, as we spoke about earlier with an ETN, you know, unlike UVXY, which would actually own the underlying VIX futures, TVIX does not have to. So it's not necessary that you'll see the footprint of T-VIX's AUM show up in the open interest of the VIX futures complex. But, you know, what I would expect to see is if all those assets don't migrate over, is that you could see a further drop in the open interest in VIX futures.

Presumably, some of it won't get rolled over, and ultimately that's going to lead to slightly lower open interest because of the hedges that are offsetting the exposure to Team VIX. So that's another thing to keep an eye on. I don't know if you guys caught this, but Goldman Sachs downgraded the SIBO today on the back of this information, basically saying that it's very bearish for VIX futures and the volume in that product, which is already down somewhat substantially from what I would call the glory days of VIX ETPs back in 2017 and early 2018. So it'll be really interesting to keep an eye on that and see how it plays out. I know that the CBOE has

intentions of listing mini VIX futures, which will have a lower multiplier. I do think that that could attract some of the more leveraged retail day trader types that are looking to get exposure to something that moves a lot, even if the market isn't. So that's something to keep an eye on. But overall, I would say that it's not a great outcome for the VIX futures space and liquidity within that space. But, you know, I've said that many times before, and it seems to be a very resilient market and people still have uses for it as we saw in March of 2020.

So two other things to keep an eye on one that's been out for a little while and one that's brand spanking new there is a a 2x or 1x inverse volatility ETF in the queue that tickers in the public domain SDI X as of today, there is a new filing for hold your breath, a TVIX replacement. Oh, my God. 2X long. 2X long. By whom?

From the same people who have S-VIX in the queue. Okay. So just quickly, Pat, do you have numbers on what that looks like from like Feb 18, right before VIX-Mageddon or whatever you want to call it, when XIV blew up to today or before this announcement of kind of open interest and volume? Yeah, sure. So the open interest, I'm pulling up the chart right now, currently open interest in all of the VIX futures. So from July all the way out to

what's listed for the South, I think Jan 21. I think Feb 21 is on the board now, I think. Feb 21 is on the board. So you're looking at about 250,000 contracts of open interest. Prior to February of 2018, that was averaging close to 600,000, 700,000 contracts of open interest in the fixed futures space. And so you've seen it come down quite significantly. And, you know, I think that there's, you know, part of that has to do with the, you know, being short VIX futures and trying to collect the carry from that trade was extremely popular and lucrative up until that, you know, XIV event happened. But the bottom line is that the performance of the short volatility trade has been less than satisfactory, especially when you compare it to the risk that you would take to, you know, just buy something like the SPY and get your

equity beta that way. And it's not to say that, you know, you can't succeed, but you have to have managers who are specializing in this that are able to, you know, effectively position well based on what the VIX curve is telling you. And it's not, you know, the taxi driver, the Uber driver is telling you about how they found this hot stock called XIV that only goes up. Those days are long behind us. And I think that, you know, partially it's in part, you know, the big CTP space was a massive source of that open interest. And, you know, we've seen this space go from five, six, 7 billion in AUM consistently down to, you know, what it is right now. So, but do you, come on, Pat, we have to make short ball great again. But I feel like is that because investors have wisened up or they're,

I feel like even if they get it now and they'll just strategically put them on, you know, maybe they don't buy and hold, but they're going to buy it when they want to buy it. Or is it the banks and the issuers saying like, Holy cow, we got a lot of risk here. Right. I think, look, I think in the case of what Credit Suisse is doing with T-VIX, it's probably the latter. You know, they're looking at the hedging book that they had to carry. They're looking at their capital requirements across the bank.

You know, they're looking at this line of business and saying, gee, nobody told us the volatility was this volatile. You know, that this thing could run from a billion to eight billion in, you know, the matter of a month. Yeah. And, you know, what's the expense ratio on TVIX? What was it? Well, it was like 1.65. So, you know, they were they were looking and making, you know, they were taking in a huge chunk of money. But, you know, can you, they were looking and making, you know, they were taking in a huge chunk of money, but you know, can you imagine the risk managers at Credit Suisse saying, excuse me, what happened? Yeah. It went from a billion to 8 billion.

And oh, by the way, yeah. And oh, by the way, if this thing turns around and drops the same way it went up, you know, we could have an implosion, you know, in the opposite direction that happened to TVEC or that happened to XIV. And, you know, we were, many observers felt that we were in that neighborhood, you know, March 16th, 17th, you know, when this thing peaked at a thousand bucks and then, you know, looked over the cliff, um, because, you know, nobody could believe that it had gotten to a thousand bucks. So once you, you know, accepted that and said, well, gee, if, if, if it could go

that high, that fast, what could happen on the other side? And you've got to believe that people at Credit Suisse were just saying, if we get out of this thing alive, we're going to figure out how to – 0.6% on our $8 billion. Yeah. But we're going to – if we get out of this thing alive, we're going to look for ways to get out of this thing. Yeah.

So I can't, you know, I don't think it's a huge surprise to people who, you know, have any sense of what's going on. Again, you know, Credit Suisse is, all the banks are under pressure. All the banks are being, you know, audited every week. Lots of scrutiny on how their capital is deployed. European banks aren't known for having tons of excess capital. And what does that look like from their risk department? They're trying to delta hedge, right?

So they're trying to be neutral on it and just earn the fee, but that's nearly impossible with all the creation redemptions well one thing that we can tell is that based on the AUM of TVIX and the you know futures positions that it holds even though it doesn't actually hold them there have been times where the exposure in terms of the open interest that TVIX would hold sorry about T-VIX would hold. Sorry about that. That T-VIX would hold within either the front month or the back month future has exceeded the open interest of that actual future that's being listed on the exchange. So that tells you right there that if in fact Credit Suisse was hedging that product,

they're not doing it with VIX Futures because otherwise it would show up in the open interest. You know, one of the interesting things right now is that if you looked at TVIX as of yesterday's close, it had about an 80% weighting in the July future based on an AUM of $1.1 billion. You multiply that by two, and that comes out to about 75,000 VIX futures. And, you know, if you look at the price, I mean, if you look at the open interest of the July future, I believe that it was right around that amount. You know, actually, it's about 140,000 right now. So the bottom line is that, you know, Credit Suisse ultimately is responsible for hedging the product in whatever they way, you know, whatever way they see best fit. It's possible that, you know, they're probably doing things over the counter.

That exposure, I would imagine, also falls into a larger, you know, index volatility book within the bank. And so they're able to effectively trade around that. So, but the bottom line, and you know, what Jim was talking about, in March, when you have, you know, TVIX goes to $6 billion, $7 billion in AUM, the changes that were going on, you know, if TVIX had fallen 40% in one day, it could have hit that force majeure clause by going down 80% in a single day because of that 2x multiplier. And so, you know, to talk kind of like an options trader, these ETPs have a short gamma portfolio profile, which basically means that they get longer as the underlying goes up and they get shorter as or I'm sorry they they do get longer and shorter as

the underlying go up and down but when you're actually managing the hedge against that position you know you're managing it in a short gamma manner where you're actually being forced to sell into down moves and buy into up moves. Yeah. And so part of that's interesting of maybe there isn't as much of an effect on the futures if they weren't even doing it all via the futures, right? If they were doing it via swaps or internal netting or whatnot do you think there's any way they were like treating it as kind of a short ball trade right of like hey lots of lots of speculation about whether there were days when you know the hedge book was just left alone yeah like it's not going to go any higher let's just right and historically if you just booked that, right, you would have made a ton of money as the bank. You got a big, big nasty tail risk, but.

I would be shocked if whoever the risk manager over there was going to allow that size of a position to just ride and hope that ball goes down. That would have been a great, like, Nick Leeson moment or something. A move would have been made of that for sure. Of, like like the guy who traded 8 billion short ball and blew out

nothing to see here keep going so I think oh and my other question was going to be do you think any of this was involved with that unfortunate story of the kid who killed himself after seeing his losses on Robin Hood do you think there's anything to do with that unfortunate story of the kid who killed himself after seeing his losses on Robin Hood. Do you think there's anything to do with that?

I'd be surprised. Probably in the worst way before that. You know, an announcement like this doesn't happen in the period of a week. Yeah. You know, it's not like Credit Suisse woke up last Monday and said, oh, you know, it's almost quarter end. What do we want to do with these ETPs? You know, I think there's been, you know, some back and forth going on for a while.

You know, they obviously went through a whole set of reconsiderations back in Feb 2018 after XIV. You know, why are we in this business business do we want to stay in this business uh they obviously made a decision to stay in the business you know then you have 2018 where things got rock or the end of 2018 when things continue to rock and roll 2019 was relatively quiet and then you have this boom and uh you know i i gotta believe that um you know this that they've been working on this for several months at least and so how did do you feel like the new new ones that come and fill this void will be capped in some way um to limit that risk or it feels like size wise that feels like it could take away all of the fun if it was capped what you cut out of for a second there on my end what'd you say pat i said that

that would that would take away all the fun if uh you know something like t-vex was capped. I mean, why would you buy it? Yeah, for sure. I want to know, right, you see the people that run the historical, what the VIX futures would have printed at in October 87, things like that. How much of an effect have these ETPs really had on the VIX pricing, you know, in Feb 18 and March 20 here, you know, do you guys have any guesses or thoughts on if there was a premium there of what did we hit in March 85 or something? Was it on the VIX? Like would it have only been 65, but we hit 85 because of these ETPs? And Feb 18, I think was probably even worse from that regard of unwinding and kind of the tail eating the dog. But anyway, what are your thoughts on that? Right. I think that these products have definitely shown time and time again that they do, you know, they are the tail

that wags the dog at times. And especially, you know, February of 18 was a great example of a U.S.-centric volatility event that really didn't spill over into any other risk markets around the world in the way that it affected ours. And I think it was a great example of, you know, what these ETPs, they're very well choreographed. You can basically model out exactly, not exactly, but approximately the amount of futures that need to be traded at the end of the day to rebalance their portfolios. I would say that in terms of an outsized effect, they certainly had more of an outsized effect in February of 2018 than they did in March of 2020. I mean, you're talking about a 10% equity pullback after the VIX had spent the better part of half a year under 12 in February of 18. And you've got, you know, spot VIX, I think, got up to 50 in the front month future, got up in the low 30s, which is pretty uncommon if you look historically at how the VIX future should have reacted to that. When you look

at a, you know, 30-35% sell-off in the S&P, it's not out of the realm of possibility for the VIX to be trading at, you know, 65 plus. I think that anecdotally, we've heard a lot of stories about, you know, Canadian pension plans that were selling massive amounts of variance and, you know, tiny put options on the S&P 500 to try and generate income in an environment where, you know, you're just not getting that from bonds. And, you know, that certainly added to the move higher that we saw in volatility. And I think that the relentless nature of that bid to volatility could definitely be attributed to them. But you can never discount the effect of these VIX ETPs, especially when they grow to the

size that TVIX did in March of 2020. All right. when they grow to the size that TVIX did in March of 2020. I would say that we've seen a proliferation of betting mechanisms. Obviously, the options markets are as big as they've ever been. The futures markets, the exchange-trad you know, let's make it easy. You don't have to trade the options. You don't have to trade the futures. Just buy a ticker. Right. Or short a ticker. And so I think, you know, there is probably, you know, a feedback loop through all of these different securities that didn't exist 20 years ago, even 2008. Yeah, I don't know if you can put the genie back in the bottle there, right?

Like people are just going to continue to innovate in the financial space and fintech and fractional shares and all the rest of it. Wait till all that comes to derivatives. It'll be the next coming. Although I think this Robinhood thing probably slowed that down a little bit. Maybe some regulation coming, but we'll see. I've talked about the kind of short gamma effect of these VIX ETPs, where they're effectively forced to, you know, buy into up moves and sell into down moves. You know, that, especially when they, you know, grow to large AUM sizes or the VIX futures have very large moves in either direction. You know, that effectively adds a bid to the implied volatility of VIX options. So if you're looking at something like the VVIX, which is the VIX for VIX options, you know, you can at times see the effect of these ETPs and, you know, the fact that they're going to be forced to buy or sell 30,000, 40,000 VIX futures at the end of the day without a 2x product in the market, at least for the time being, you may see the implied volatility of VIX options come down a bit because there's less gamma within these VIX ETPs. And so that's kind of a second order effect that may not, you know, immediately be obvious. And that's definitely something that we're keeping an eye on,

is how the implied volatility of these options change as, you know, presumably the AUM within the VIX ETP space goes down. And yet, VVIX is above 100. I forget what the streak is. You know, Russell Rhodes has been out saying it is the longest streak in history. I forget how far VVIX goes back, but, you know, still, and even, you know, VIX and the rest of the SIBO term structure, you know, all of those data points are, you know, the 90 plus percentile of their historical ranges. So notwithstanding the fact that the NASDAQ is back at an all time high and blah, blah, blah, blah, blah. The volatility market is saying, we're going to hold out here a little bit.

I'm not sure this is going to stick. You think that's from explicit hedging and putting on these put options and whatnot, or do you think it's more of a just general trader feeling of, I want, I want some long ball flavors. Well, you know, if, if you just look at VIX, you know, as a mechanical calculation based on a strip of SPX options, you know, it's saying that people are bidding options. Yeah. They're bidding the call side too, right?

Well, exactly. I think what you're seeing, and Pat's closer to it than I am, you know, we're definitely seeing days when the call bid is stronger than the put bid, and it flips around, and the put bid's stronger than the call bid, but everything's bid. Yep. And at the end of the day, realized volatility in the S&P 500 is still pretty robust. If you believe that the VIX is predicting what realized volatility will be, I'm not saying that that's necessarily true. But, you know, over the last month, the realized vol of the S&P has too far off. And, you know, I think another valuable indicator to look at in

the VIX space is the shape of the term structure. And, you know, you can talk about a few points here and there of contango or backwardation. But, you know, if you zoom out and kind of look at the big picture, we're looking at an extremely flat VIX term structure, which in my mind indicates that this market does not know what's going to happen. But it understands that there is, you know, a lot of risk out there and the potential for things to go phenomenally wrong or, you know, potentially go really well. But the bottom line is that, you know, the volatility market is saying we don't really know. And therefore, if you want to speculate on this, you're going to, you know, not really be able to collect a lot of role in either direction that you want to speculate on.

And the overall level of spot volatility is, is still fairly expensive relative to history. That's not to say that it's expensive relative to what the market ends up realizing. But, you know, definitely, we're in close to the tails of the distribution here, which seems to be the theme of 2020. And that curve has a big spike, though, in October, right? That's the election or is that second wave of COVID? What are your thoughts on that? It's been around since before COVID. So, you know, it has been attributed to the election. You know, the October expiration is the last one before the election. And so that hump has been attributed to the uncertainty around the election. That last election, I remember the spike was erased in like two and a half hours or something overnight.

The spike down. So I don't know how wild. Yeah. I don't know how volatile an event it would be. So, guys, I had a couple of quick Twitter questions we'll do before we head out. How does the process of delisting happen without large market impact? So guys, I had a couple of quick Twitter questions we'll do before we head out. How does the process of delisting happen without large market impact? Any thoughts on that? I think they mean the ETN price going down substantially as everyone's a for-seller. Well, I think, you know, if you look at the overall size of the product, it's, you know, effectively long about 75,000 VIX futures. So when you look at what the market

impact will be, I mean, obviously that exposure rolling out of the market could cause there not to be as much of a bid for volatility. But the other thing that you need to look at is the offsetting positions that market makers, credit suites themselves have on against the position. It could effectively, in my opinion, it could have a market impact. It's difficult to quantify exactly what that amount would be. I would not be surprised to see the VIX futures trade somewhat lower than what you may expect due to the, you know, selling of VIX and VIX futures as the corresponding hedges for the product come off. What about the TVIX price itself? In theory, it would get driven down by this, or they can just redeem without needing a buyer on the other side? you know, some smart guy like Pat, scoop up a bunch at a discount to NAV. And then, you know, as an AP, go to Credit Suisse and say, here you go. And just do a redemption and pick up,

you know, the difference between the discounted price and NAV. Right. So there's an ARB built in there to let it. Yeah, there's an ARB in there, you anybody cares, we'll see over the next couple of weeks how it plays out. And then the other question was, do you see any effects from the other products they have getting delisted? UGAZ, I don't even know what most of those trade, but any thoughts there? Well, you've got two that are long short, Nat Gas, a long short gold, a long short silver, and I have no idea. Don't pay attention to those markets. Yeah, but they're not this big as this, right?

So in theory, the impact would be limited. The biggest one of those is UGAZ at roughly $500 million. All right. And so I'm going to just do an abbreviated version of our favorite section. I'll ask you both your favorite investing book. Reach back behind you there, Jim. Yeah, exactly. That's a good question. I got one off the top of my head. It's one that I've been reading.

I hope that it will become topical quite soon. It's called The Second Lake Down by Hari Krishnan. It's got a variety of really good approaches to trying to implement hedges or reduce equity beta in an already volatile market. I highly recommend it. It's got a lot of applicable examples. It was written relatively recently and Hari is a really concise and clear author. He actually manages the put ladder on our mutiny fund product that uh okay yeah so we know him well so i yeah concur on that one great choice tough act i'm i'm spacing on the uh on the on the title of the one that i'm reading now which i'm

which is kind of fascinating because it's not a world that i've spent a lot of time in but it's uh it's it's basically all about the carry trade you guys probably know what the title is that I'm spacing out on all I remember about the carry trade was that back in 08 the hedge fund guy whose boat was named carry and it got yeah the uh um favorite blues band or instrument oh wow yeah i i did uh offer that up didn't i yeah you know i've got i've got so many favorites but uh probably the all-time favorites would be you know, Muddy Waters and Robert Johnson, you know, the real old Delta blues. And, you know, to me, it just doesn't get any better. You've got all kinds of permutations and modernizations. There was a,

there was a tweet out today, you know, who's the most overrated guitar player. And I was, I was offended because of a whole bunch of people jumped in and said, Eric Clapton, who happens to be one of my favorites so i don't know you know twitter's tough twitter's tough the uh i would say steely dan maybe it would be my most overrated uh well they they uh as as as a band or or yeah yeah i don't know his real name even so that shows my depth in the guitar world yeah but they actually used uh a on almost all of their albums uh walter becker was the guy who was nominally the guitar player at skibbley dance sorry i'm taking you down the rabbit hole yeah

but um if you if you look at their albums they basically cherry picked uh the best new york and los angeles session players uh to play on all their records so they had a truly all-star lineup of guitar players uh across their albums all right bad pick uh learn something new right pat you're from chic Chicago originally or spent time in Chicago? I'm from there originally, yeah. Favorite Chicago pizza spot? That's a tough one. There's only one right answer. I'm kind of in the camp that I, you know, this might be blasphemy coming from Chicago, but Chicago deep dish is a completely different type of food to me than, you know, a New York style pizza.

That being said, there's a great spot in the suburbs called Giordano's where I grew up. Very good pizza, Chicago style, thin crust, you know, square cut. It's, I'd love to get back there and get some of that. Nice. you know square cut it's uh i'd love to get back there and get some of that nice we'll take you next time here and then uh ask you both favorite star wars character gotta go with yoda sorry yoda love it the master i'm gonna go with uh r2d2 r2d2 right. Do you speak any R2? I don't, but he's a classic. He's always there. He's got your back.

He comes in the clutch. He'd be great to have in the trading world, right? Like R2, run this thing, and he just plugs into the... I have to tell you a very quick story about the original Star Wars. I'm watching it in a movie theater in Bismarck, North Dakota.

Don't ask. Wow. And the Death Star explodes. And this is, you know, 1977 or eight. Yeah. And literally the film broke. So the theater went dark as soon as the Death Star exploded. Full on drama. Exactly. I love it. And how long did it take you to watch the last five minutes? It took them like 15 minutes to get it taped back together and rerun. I was going to

say it was like seven years later or 28 years later you watched the last five minutes. Alright guys, it's been fun uh yeah like i said we'll try and get you both on a full pod later on talk about your strategies but thanks for uh diving deep on the tbix and this event we'll talk to you soon pleasure thanks you've been listening to the derivative links from this episode will be in the episode description of this channel follow us on twitter at rcm alt and visit our website to read our blog or subscribe to our newsletter at rcmalt.com if you liked show, introduce a friend and show them how to subscribe.

And be sure to leave comments. We'd love to hear from you.