Volmageddon, a blending of the words volatility and Armageddon, refers to the extraordinary U.S. stock market activity that took place on February 5, 2018.
On February 5, 2018 the Cboe Volatility Index (VIX) increased from an opening value of 18.44 to 37.32 at close, after about a year of low stock market price volatility. The stock market, along with price indexes tied to its performance, rallied strongly throughout January 2018 after having mostly risen for the previous few years. Market volatility as measured by the VIX had been mostly subdued. But in early February, market sentiment turned negative and the stock market sold off substantially on February 2, a Friday. On Monday, the stock market continued its plunge and the VIX began to rise, more than doubling from open to close.
Failure of the XIV
The tale of Volmageddon is really the story about what happened to the short-sellers of volatility on February 5.
Ever since the stock market began its long rebound from the 2008 recession, shorting volatility had become increasingly popular with funds and asset managers. Several exchange-traded products tied to the inverse of Cboe Futures Exchange VIX futures started trading on securities exchanges. Among them was the VelocityShares Daily Inverse VIX Short-Term note, whose ticker was XIV and which were issued by Credit Suisse Group. The low volatility of the 2017 stock market fed interest in leveraged short volatility trades, especially in the XIV.
In the Armageddon aspect of Volmaggedon, XIV notes shrank from $1.9 billion in assets to $63 million during that one trading day. On February 6, the next day, a half dozen volatility instruments did not open for trading. Credit Suisse Group announced that day that it was "acclerating" a final payment to holders of XIV notes on February 22.
Some academic researchers and market observers noted that the structure of inverse exchange-traded volatility instruments like XIV that call for rebalancing might have created a feedback loop, especially in light of the absence from the marketplace of many other natural shorts. According to this view, the rise in VIX futures was exacerbated by these products having to buy futures as the futures price was already rising to maintain the products' balance.
Litigation against Credit Suisse Group
A little more than a month after Volmageddon, Credit Suisse was sued by an investor who claimed that the bank had manipulated the futures price causing the price of the XIV to plummet and that it had profited from the market move. Credit Suisse responded that its trades were part of its well-documented, previously disclosed hedging strategy and could not therefore evidence a manipulative intent. The suit was dismissed by the federal district court in New York which first heard it but that decision was later overturned on appeal in April 2021. As of June 2021, the case was moving forward.
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