There is a lot of speculation about what happened in the stock markets last Monday evening. This Monday had been a rough day during regular trading hours, but not something unusual. Major indices posted solid losses and volatility had gone up considerably, but nothing different from what we had seen many times before in history. Most traders had taken a deep breath, closed their books and went home or out for dinner, hoping for a recovery of stock prices the next day. That is namely what happened most of the time (and, in fact, did happen this time).
So, most traders had left, the major exchanges had closed and only a small group of traders remained active in the caverns of stock trading, concerning themselves with the trading of futures, options and the like. Normally, the trades they make form either the afterburner to the same day’s session or constitute an early prelude to tomorrow’s session. They might give you a hint of what the stock markets will look like tomorrow, but chances are that traders have a completely different mindset after a good night of sleep.
Since this is only a small group of traders that is active, their choices could have a relatively high impact. And during the after-hours, their choices cannot be checked against the prices of ‘real’ stocks, as the major stock exchanges are closed.
And then there is another thing. There is this growing group of traders who do not go home to their families and do not go out to have dinner. In fact, they do not go out for breakfast and lunch either. They never go home. They never sleep. These traders are all part of the same family, the Algo family: computer programs which concern themselves with trading stocks and other financial instruments automatically.
A growing group of analysts think that we witnessed another so-called flash crash last Monday, a repetition of the 2010 flash crash in another appearance. This time it did not concern itself with the stock markets at large, but only with a niche: volatility-related securities. The combination of only a small group of humans present and this huge group of automatic traders who never go to sleep is a likely candidate to be the lethal combination which in fact did not kill something, but blew up volatility to magnitudes which overshadowed previous occasions of rising volatility big time.
Because the number of causalities of this new flash crash was low and major stock indices were not affected directly (and recovered to a large degree the next day), most traders will pass over the events of last Monday evening in silence. But it is more likely that we have witnessed the dying of a canary in the coalmine that evening. This flash crash only struck a small number of securities in the markets, among which XIV ETNs. The next flash crash will set all markets on fire.
The movement of markets is hardly relevant to the value of XIV ETNs. All major US indices recorded small or moderate gains yesterday. But XIV ETNs are left to their own devices. The outlook of the termination of these ETNs make its valuation very difficult. Their value ranged (roughly) between $6 and $7 yesterday. They closed with a solid loss. ‘Whatever you can get for it’ seems to be the mechanism that is determining their price.
Danny Daredevil, Adventurous Anny, Solid Suzy and Lazy Larry are basically cannon fodder. Their RSS’s range from -94% to -90%.
None of our models gave a trading signal at the end of yesterday’s session.
RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return
The Chapel Family – Episode 20