Why Cboe Global Markets, Inc. Stock Is Sinking Today

Two investment products linked to the Cboe Volatility Index (VIX) imploded in U.S. after-market trading on Monday.

Investment bank Credit Suisse has the the biggest holding in the XIV ETN (exchange traded note), and calculations by ForexLive indicate the bank may be facing losses of $US500 million in connection with their position. After the dust settled, the combined assets in the two exchange-traded products shrank to $135 million.

US stocks plunged almost 8 percent in three trading days until Tuesday as an explosion in implied volatility readings prompted investors to dump equities on growing anxiety about overheating economies, inflation and rising borrowing rates. Volatility, of course, is exactly what investors are getting as financial markets plunge for the second day in a row. It was set up so that if volatility fell, you would make money.

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.

Trading in the VelocityShares Daily Inverse VIX Short-Term ETN, ProShares Short VIX Short-Term Futures ETF and VelocityShares Daily Inverse VIX Medium-Term ETN has been halted and all three products had a short-selling restriction placed on them by Nasdaq.

This was the first serious test for these ETFs, most of which were launched after the global financial crisis.

"If vol (implied volatility) stays between 20 and 30 for a protracted period of time, some of the existing volatility-targeting strategies would have to de-risk", said Vineer Bhansali, chief investment officer at California-based investment adviser LongTail Alpha, a firm that runs tail-risk strategies using options and other types of derivatives.

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Credit Suisse's share price has recovered slightly following a statement to the effect that the bank's exposure to the XIV ETN was fully hedged and CS therefore won't be affected by any of the losses relating to it. To professional investment managers, volatility is measured in multiple ways.

Though estimates of how much money is actually parked in such strategies are hard to come by given a general lack of transparency, some broad numbers exist. On the other hand, values lower than 20 are considered synonymous with low volatility, implying the market is not stressed and rather confident about future prospects. But effectively, any option is a bet on the volatility of the underlying asset. Since it trades as an ETF, it should theoretically open regular trading on Tuesday down about 95% from the previous day's close.

As the stock market suffered through its worst stretch in years earlier this week, readers of Business Insider kept asking one interesting question: What on earth does this mean for Seth Golden?

"Even though at some point investors will show up to buy the dip in stocks, we don't think short volatility is a buy here", said Stephen Aniston, president of investment adviser Black Peak Capital, in CT.

"You have some less sophisticated investors that don't understand the VIX complex in total, not to mention the F-1 filings of the products they're participating in", said Seth Golden, president of Finom Group, adding that many of them were pushed out of the trade.

The warning also served as a victory lap of sorts for Kolanovic, who had been warning about a volatility blow-up for months leading up to Monday's chaos.

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