VIX Volume Explodes in ETPs as Volatility Securities Set Record

  • Volume exceeded 4 percent of total U.S. trading for first time
  • Traders piled in to exploit a rare outsized jump in VIX

The worst market contortions since February are making stars out of once-obscure exchange-traded products tied to equity volatility.

Trading in five of the most popular securities linked to moves in the Chicago Board Options Exchange Volatility Index surged to more than 4 percent of total volume on U.S. exchanges, a level that before this week had never been reached, according to data compiled by Sundial Capital Research Inc. and Bloomberg.

As shares lurch, appetite for the securities, which sport names like iPath S&P 500 VIX Short-Term Futures ETN and ProShares Ultra VIX Short-Term Futures, is being stimulated by anomalous swings in volatility itself, which has occasionally come untethered from stocks in recent days. Take Monday, when the VIX surged more than 20 percent. It was only the fourth time in 30 years that’s happened on a day when the S&P 500 Index fell less than 1 percent, according to Sundial.

“In order to make money on a VIX-related ETF, especially a leveraged one, you better have a big move in a very short period of time,” said Randy Frederick, managing director of trading and derivatives at of Charles Schwab Corp. “When volatility starts to move in a big amount, that’s when speculators and retail traders jump in.”

The S&P 500 posted its steepest retreat since February in the five days through Wednesday amid concern over the potential fallout from Britain’s June 23 referendum that would lead the country to exit the European Union. While the equity benchmark index hasn’t fallen 1 percent during the stretch, the VIX jumped more that 15 percent in two sessions, including a 23 percent increase on Monday. Since 1990, such a move has been accompanied by an average drop of 2.4 percent in the S&P 500.

Trading in the iPath S&P 500 VIX Short-Term Futures ETN, known as VXX, the ProShares Ultra VIX Short-Term Futures, an exchange-traded fund called UVXY, and three other volatility ETPs exceeded a combined 250 million shares in each of the last five days, with transactions hitting a record 470 million on Tuesday, data compiled by Bloomberg show. Almost 370 million shares changed hands on Thursday, or 5 percent of the overall market volume. 

The rush to VIX products occurred at a time when broad equity trading was down from levels during the peak selling of the two last corrections. Even on Tuesday when volume increased to 7.4 billion shares, that’s about half the size on Aug. 24 and compares with the daily average of 7.7 billion this year.

Before it's here, it's on the Bloomberg Terminal.