7 ms·

This bug had serious real-world consequences for real people: https://www.reddit.com/r/tradeXIV/comments/7vi6oa/xiv_after_hours/ https://www.reddit.com/r/tradeX

This bug had serious real-world consequences for real people: https://www.reddit.com/r/tradeXIV/comments/7vi6oa/xiv_after_hours/ https://www.reddit.com/r/tradeXIV/comments/7vi6oa/xiv_after_...

mherdeg 5y ago
That subreddit reminds me I've been meaning to follow up on https://www.bogleheads.org/forum/viewtopic.php?t=288192 https://www.bogleheads.org/forum/viewtopic.php?t=288192 (outperforming the market by holding UPRO/TMF). Wish that person were still disclosing their returns over time.
- smabie 5y ago
  Not sure if they outperform on a risk adjusted basis but both UPRO and TMF are 3x levered (55%/45% weight) A more fair comparison would be like 33% UPRO and 66% TMF. This would get you a portfolio that is similar to SPY, but with some leveraged treasuries on top. Regardless, bonds have done really well due to the drop in interest rates over the last 10 years and I doubt they can go any lower. Bonds will probably perform a lot worse in the future, unless the fed wants to try out negative rates (unlikely). Also you don't need them to disclose their returns, you can construct your own version: https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio Edit: constructing the portfolio, it does seem to outperform SPY on a risk adjusted basis, with a Sharpe of 1.25 from 2010-2021. However, my caveat about bonds still stands.
  - quickthrowman 5y ago
    Agreed, long Treasurys has a low reward, high risk setup. Particularly if you believe the inflation narrative.
    - reducesuffering 5y ago
      The risk/reward in isolation isn’t useful, because the market has priced in and bid them up so to their favorable inverse correlation with equities the past 40 years. Assets are priced due to their usefulness in the risk/reward for a portfolio as a whole.
    - cudgy 5y ago
      Who buys long treasuries other than the Fed?
      - imtringued 5y ago
        Pretty much every nation that has a trade surplus with the USA, worse it's also possible that a trade surplus between two non USA countries can result in the purchase of treasuries if they transact in USD. I say "worse", because this money can only enter the US economy by making the government run a deficit, if it does not do this then unavoidable unemployment is the consequence.
- reducesuffering 5y ago
  They’re projecting future returns and correlations based on past 50 years (the ones we have easily available financial data) on constantly lowering interest rates. If asset inflation already pumped up both long term treasuries and stock assets (which pumped up 3x levered UPRO and TMF), then a follow on interest rate increase will equivalently destroy a stock asset and long term treasury portfolio, triply so for those. They think they’ve found an edge in the market (lol like major financial players don’t know about long term treasury and stock asset inverse correlation the past 40 years), but in reality they’ve just ignored the potential for substantial interest rate increases, because it’s not in their data, and they’re pocketing the extra on top until it blows up (they don’t realize it will).
cm2187 5y ago
I don't think these discussions are about the bug, but rather about being wiped out by what the vix did that day. Which leads me to what I think is the real fuck up. Not only the index was also live during after hours, but the fixing used as the basis for the formula for the next day was set at a time after trading hours. I am not 100% sure but I don't think this was the case when the index was initially published. What that meant was that to replicate the index, the market-makers of the XIV and other short-VIX ETNs had to hedge themselves in after-trading hours market, i.e. in a much less liquid market. And that's when the short-squeeze happened. Now would that short-squeeze have happened during trading hours when there was more liquidity? Possibly, you would need to ask a market participant. But at the minimum it made the problem a lot worse. And I am surprised no one got any heat for that.
- rank0 5y ago
  Just want to point out that a "short squeeze" is not possible with these volatility ETNs. They are collateralized debt instruments for which there is an unlimited supply. The underlying for these products is /VX futures, which also have an unlimited supply. A short squeeze happens when short positions cannot be covered due to limited availability of the underlying. XIV collapse was caused by an unprecedented spike in the VIX index.
  - cm2187 5y ago
    A short squeeze also happens when you have forced buyers (desperate to close their short VIX futures position) with a limited supply of sellers. Which is exactly what happened that day. It’s not the VIX index itself that caused the XIV to be wiped out.
    - rank0 5y ago
      They would just have to pay the premium that short sellers were demanding. I see your point, but calling it a short squeeze seems odd to me. "Volpocalypse" was indeed an unprecedented spike in IV, which the futures market was reacting to. Seems pretty different to me than the classic short squeeze scenarios of GME or Volkswagen.
deleted 5y ago
[deleted]
cyanydeez 5y ago
its not a bug, it was a undisclosed "feature"
anonu 5y ago
No. The connection you're making is not correct. Since the GFC we were in a very low vol environment (2008 to 2017) so people shorted vol, picking up pennies, for years... Via XIV. The size of the fund caused it to blow up on one vol spike day. It's built into the mechanics of the fund. And has nothing to do with the fact that the index calculator failed to provide a realtime price after hours.

This bug had serious real-world consequences for real people: https://www.reddit.com/r/tradeXIV/comments/7vi6oa/xiv_after_hours/ https://www.reddit.com/r/tradeXIV/comments/7vi6oa/xiv_after_...

mherdeg 5y ago

That subreddit reminds me I've been meaning to follow up on https://www.bogleheads.org/forum/viewtopic.php?t=288192 https://www.bogleheads.org/forum/viewtopic.php?t=288192 (outperforming the market by holding UPRO/TMF). Wish that person were still disclosing their returns over time.

smabie 5y ago
Not sure if they outperform on a risk adjusted basis but both UPRO and TMF are 3x levered (55%/45% weight) A more fair comparison would be like 33% UPRO and 66% TMF. This would get you a portfolio that is similar to SPY, but with some leveraged treasuries on top. Regardless, bonds have done really well due to the drop in interest rates over the last 10 years and I doubt they can go any lower. Bonds will probably perform a lot worse in the future, unless the fed wants to try out negative rates (unlikely). Also you don't need them to disclose their returns, you can construct your own version: https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio Edit: constructing the portfolio, it does seem to outperform SPY on a risk adjusted basis, with a Sharpe of 1.25 from 2010-2021. However, my caveat about bonds still stands.
- quickthrowman 5y ago
  Agreed, long Treasurys has a low reward, high risk setup. Particularly if you believe the inflation narrative.
  - reducesuffering 5y ago
    The risk/reward in isolation isn’t useful, because the market has priced in and bid them up so to their favorable inverse correlation with equities the past 40 years. Assets are priced due to their usefulness in the risk/reward for a portfolio as a whole.
  - cudgy 5y ago
    Who buys long treasuries other than the Fed?
    - imtringued 5y ago
      Pretty much every nation that has a trade surplus with the USA, worse it's also possible that a trade surplus between two non USA countries can result in the purchase of treasuries if they transact in USD. I say "worse", because this money can only enter the US economy by making the government run a deficit, if it does not do this then unavoidable unemployment is the consequence.
reducesuffering 5y ago
They’re projecting future returns and correlations based on past 50 years (the ones we have easily available financial data) on constantly lowering interest rates. If asset inflation already pumped up both long term treasuries and stock assets (which pumped up 3x levered UPRO and TMF), then a follow on interest rate increase will equivalently destroy a stock asset and long term treasury portfolio, triply so for those. They think they’ve found an edge in the market (lol like major financial players don’t know about long term treasury and stock asset inverse correlation the past 40 years), but in reality they’ve just ignored the potential for substantial interest rate increases, because it’s not in their data, and they’re pocketing the extra on top until it blows up (they don’t realize it will).

cm2187 5y ago

I don't think these discussions are about the bug, but rather about being wiped out by what the vix did that day. Which leads me to what I think is the real fuck up. Not only the index was also live during after hours, but the fixing used as the basis for the formula for the next day was set at a time after trading hours. I am not 100% sure but I don't think this was the case when the index was initially published. What that meant was that to replicate the index, the market-makers of the XIV and other short-VIX ETNs had to hedge themselves in after-trading hours market, i.e. in a much less liquid market. And that's when the short-squeeze happened. Now would that short-squeeze have happened during trading hours when there was more liquidity? Possibly, you would need to ask a market participant. But at the minimum it made the problem a lot worse. And I am surprised no one got any heat for that.

rank0 5y ago
Just want to point out that a "short squeeze" is not possible with these volatility ETNs. They are collateralized debt instruments for which there is an unlimited supply. The underlying for these products is /VX futures, which also have an unlimited supply. A short squeeze happens when short positions cannot be covered due to limited availability of the underlying. XIV collapse was caused by an unprecedented spike in the VIX index.
- cm2187 5y ago
  A short squeeze also happens when you have forced buyers (desperate to close their short VIX futures position) with a limited supply of sellers. Which is exactly what happened that day. It’s not the VIX index itself that caused the XIV to be wiped out.
  - rank0 5y ago
    They would just have to pay the premium that short sellers were demanding. I see your point, but calling it a short squeeze seems odd to me. "Volpocalypse" was indeed an unprecedented spike in IV, which the futures market was reacting to. Seems pretty different to me than the classic short squeeze scenarios of GME or Volkswagen.

deleted 5y ago

[deleted]

cyanydeez 5y ago

its not a bug, it was a undisclosed "feature"

anonu 5y ago

No. The connection you're making is not correct. Since the GFC we were in a very low vol environment (2008 to 2017) so people shorted vol, picking up pennies, for years... Via XIV. The size of the fund caused it to blow up on one vol spike day. It's built into the mechanics of the fund. And has nothing to do with the fact that the index calculator failed to provide a realtime price after hours.