Why Can Banks Do This Again? in [Market-Ticker]

Posted 2012-03-23 07:58
by Karl Denninger
in Editorial

Why Can Banks Do This Again?

They don't even bother hiding it any more....

Credit Suisse Group AG (CSGN), under pressure to restore order to an exchange-traded note tracking U.S. equity volatility, said it will start resupplying the market with shares today after cutting issuance off in February.
Stock will be added to the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), or TVIX. The security, designed to track futures on the Chicago Board Options Exchange Volatility Index, has whipsawed investors for the past month, climbing 89 percent above its asset value before plunging 29 percent yesterday.

You don't think that having that inside information might have made possible an "extraordinary" profit, do you?

It's not like anyone else couldn't have bet on this, of course. As price rose all out of whack with the underlying, anyone (if you could get a borrow) could short it and it appears plenty of people did.

But the real question doesn't lie there. That question lies in whether or not Credit Suisse's decision was "clean" (that is, nobody who had the inside information traded on it or not.) There's nothing wrong with anticipating something you believe and trading on it. It's only wrong if you know because you're either the person with the decision or that person tipped you.

In any event this sort of disconnect makes clear exactly how "broken" these sorts of instruments can be, and the extreme risk you, as an individual investor, take in trading or holding such things. Indeed, one wonders whether or not an intentional act of withholding creation of units into demand that is causing a disconnect is properly disclosed in the prospectus and thus whether such a discretionary act is within the right of the managing entity.

This is somewhat of a Catch-22, in that if it's not then there's a problem, but if it is then as a potential trader in this instrument you're on notice that the manager may act in an entirely arbitrary manner and contrary to your interests.

Do you really want to trade something like that?

Something to think about.

Discussion below (registration required to post)

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User Info	Why Can Banks Do This Again? in forum [Market-Ticker]
Randy123 Posts: 5773 Incept: 2008-09-24 Earth	Having traded both VXX and TVIX in the past, I wouldn't touch them again. ---------- China is the Enemy. Wake Up. New Normal. Same As The Old Awful. 2012-03-23 08:00:22 Permalink
Aztrader Posts: 6648 Incept: 2007-09-10 Scottsdale, AZ	How many more etfs with off balance sheet derivatives will do this for no reason? These markets are complete rigged in favor of the people that design these products............ 2012-03-23 08:47:32 Permalink
Teomax Posts: 1704 Incept: 2007-08-30	f.ck that. didnt know about tvix being substantionaly up above premium, therefore i was holding a position in TVIX and loose big time. ---------- "To make money, it helps to understand how individuals and others have been brainwashed (ie the notions that colour your perception of reality - sorry for the negative connotation) and to pay attention to the flow of money" Wampeter i hope you understand my engrish. 2012-03-23 10:56:22 Permalink
Bertdilbert Posts: 2655 Incept: 2008-12-22 CA	Quote: Why Can Banks Do This Again? Because banks own government. It is like asking why your bubbles rise to the surface when you exhale from your regulator. ---------- Dear Euroland: Relax, Germany has a plan for your money! Political Capital Defined: We are out of money but will tax our citizens for whatever it takes to "SAVE" the Euro. 2012-03-23 10:56:34 Permalink
Preidt2 Posts: 552 Incept: 2009-07-31 spokane/wash	CORRZINee is still FREE the prez suck bud ---------- Puppets Under Destruction 2012-03-23 11:31:45 Permalink
Gamma Posts: 5549 Incept: 2008-01-20 Northern CA	I'm amazed every day that VXX loses a buck or so, and that happens every day. And that's just the single VIX dude. ---------- This stuff we're going through, this is nothing compared to the Middle Ages. They told me if I voted for John McCain, an idiot would be a heartbeat away from the presidency. Sure enough... 2012-03-23 13:01:16 Permalink
Frankschoenburg Posts: 178 Incept: 2011-08-05 Northbrook, IL	Quote: Do you really want to trade something like that? Nope 2012-03-23 13:13:36 Permalink
Hiphopapotamus Posts: 569 Incept: 2007-07-11 Burbank, CA	If these etf's are rigged to slip in one direction, can't they be profitably traded by shorting them? 2012-03-23 15:16:01 Permalink
Ramthebulls Posts: 10849 Incept: 2007-09-24 Queens, NY	Hiphop: Yes, if the IV of an ETF is less than it is trading for, it can be shorted profitably. The IV of ETFs is available in real time, so this is not a difficult trade to make -- just be sure to have some margin free in case the mispricing gets more severe before correcting. Witness the insanity in GAZ (recently trading at 150% over its IV). ---------- Umbrage is like love. No matter how much someone takes, there's always more for you to give. 2012-03-23 15:18:07 Permalink
Hiphopapotamus Posts: 569 Incept: 2007-07-11 Burbank, CA	Thanks, Ram. I assume you look at these as only short-term trades (ie. not held overnight)? 2012-03-23 15:22:02 Permalink
Ramthebulls Posts: 10849 Incept: 2007-09-24 Queens, NY	I traded and held PTM and GAZ for several weeks (previous arbitrage opportunities) waiting for them to come to fruition. I never got in on TVIX because my capital was tied up in other stuff and TVIX ended up collapsing before I got around to shorting it. ---------- Umbrage is like love. No matter how much someone takes, there's always more for you to give. 2012-03-23 15:49:28 Permalink
Ironman09 Posts: 2792 Incept: 2007-08-08 La La Land	All of sudden you see the what happened and wanted to short TVIX huh ? TVIX went down in straight line from 100 to 7. You wanted to short this sht at 15 ? I really doubt anyone could really short the TVIX in last two days. I think market makers playing criminal game here. Even Credit Suisse Group AG (CSGN)did not have any clue until late afternoon. They basically shot all the TVIX longs with a bazooka to clear the market for high volatile period starting next Monday. I followed all news and bloggers and news writers all seems to know or figured out that this is a disaster but then there was a extremely high demand for TVIX so if demand was much higher than supply, why would it crash like this ? This why many investors are just saying "*** OFF" to WS and stockmarkets. ---------- - Short the Phone Book roll-over to 1330 ( May 6th,2013) Last modified: 2012-03-23 21:46:57 by ironman09 2012-03-23 21:38:33 Permalink

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