Ex-Goldman Volatility Trader Sees More Blood Before Rout Ends

  • Yamada says it’s hard to gauge the amount of short-vol trades
  • Says slump will eventually end because fundamentals aren’t bad

VIX at Highest Level Since August as Stocks Tumble

Makoto Yamada, who traded index-linked derivatives including volatility at Goldman Sachs Group Inc. before joining a Japanese brokerage, sees more pain before the stock rout ends.

For Yamada, who’s now head of equity trading at SMBC Nikko Securities Inc., investors have been shorting volatility without realizing what impact it would have on the market. Now, as those trades are being systematically unwound, it’s dragging down U.S. stock indexes.

“Nobody probably knows how much of these bets are out there,” Yamada said in a phone interview from Tokyo. “Stocks are having to be sold after prices move by a certain extent, like 3 percent or 4 percent. This is really shaking up the markets.”

Estimates of how much money is tied up in instruments that profit from lower equity turbulence differ, but one estimate from Chris Cole of Artemis Capital Advisers puts the total at more than $2 trillion. The Cboe Volatility Index jumped to 38.8 on Monday, its highest since August 2015, spurring investors to unwind their trades.

For Yamada, who joined SMBC Nikko in 2015, stock prices are becoming divorced from their true value, but the downturn won’t stop until such trades are covered. In one positive sign, VIX futures pared declines in Asian trading on Tuesday.

“The drop will stop somewhere because fundamentals aren’t bad at all,” Yamada said. “But it won’t stop until the pus is lanced from the boil.”

— With assistance by Rachel Evans, and Elena Popina

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