Who is Selling Volatility – and Why?

Published on
June 4th, 2019
44 minutes

Using Technical Analysis in Today’s Market and Tomorrow’s

Who is Selling Volatility – and Why?

The Interview ·
Featuring Andrew Scott

Published on: June 4th, 2019 • Duration: 44 minutes

All this month, Real Vision is focusing on volatility. In the first “Tuesday Trends” piece for June, Andrew Scott, managing director at Societe Generale, walks Mike Green through the structural players in the world of volatility. Scott quantifies who the biggest seller of volatility is globally, and why North American volatility continues to be the place where volatility risk-premiums are the juiciest. Filmed on May 22, 2019 at the EQDerivatives conference in Las Vegas.



  • AJ
    Angus J.
    25 June 2019 @ 01:24
    Great interview and comments Having traded both listed and OTC Asian vol before and during the GFC there are a couple of points I feel are worth making. - The short vol products sold to retail investors were predominately offered by the French and German banks. The main market was Korea but we saw them sold all across the region. The most popular one was called an "Accumulator" which consisted of a ladder of OTM puts. - These products were so popular that the long vega position of the issuance banks became too large to hedge in the interbank long dated vol markets. They hedged their vega exposure via LT vol swaps and selling short term gamma in the Kospi 200 option market. After they had crushed Kospi vol they continued selling both short and long term vol in Nikkei, Hang Seng and S&P. This massively distorted the risk reversals, calendars and intramarket basis into the GFC - As the GFC kicked off volatility initially moved higher and all the market and duration mismatches came undone. We saw vol markets like the Hang Seng bid-no offer for days across the curve. - When risk management teams took over the forced vol buybacks across the whole universe. If Andy's thesis is correct things could get very interesting again
  • dm
    david m.
    20 June 2019 @ 16:05
    What is the total notional of these structured notes out there? In a scenario where vol spikes beyond risk parameters, do the banks close the buyback window, ie, choose to not buy the products back? Since the issuer is essentially the sole market maker, this would suck. In a typical prospectus for these things, it is mentioned dozens of times that the buyback window is entirely at the discretion of the issuer. They mention this over and over again. I saw that these products are intended to be held to maturity, but doesn't that assume a reasonable/low amount of tracking error relative to formula value/underlying and maybe even some expectation of liquidity in a worst-case scenario. What happens when CDS spread's blow out thereby potentially impairing the mark-to-market of these products and possibly causing some folks to decide they want out? Isn't the biggest component of these products a zero coupon bond (presumably properly accounted for on the BS and not an off-BS item)? Do the 99% holders become 99% sellers? If demand for these notes drop, how impactful would that be to bank revenue's? I understand that the product is domiciled in an SPV so I guess the debt is accounted for in the SPV? and not the parents' BS? But then technically its still an off-BS item. Apologies for my incoherent ramblings. Just trying to get a better understanding. Any insight would be very much appreciated.
  • NR
    Nelson R.
    14 June 2019 @ 02:35
    One of the best interviews in RV. Nice job lads.
  • MC
    Mario C.
    6 June 2019 @ 01:39
    Overall very good interview (as usual with MG). Just one point to balance the scary tone of it: these products are not new at all, they have been there in very large volumes in the Japanese and Korean retail markets for 15 years or so, well before Central Banks actions depressing yield curves. And they went through the Knock-In events back in Q4 2008. It didnt kill these products popularity at all. Their issuance size just came back quickly post GFC. What is new (and impacting investors in the US) is the massive diversification to non Asian underlyings, impacting the SP500 vol dynamics: SP500 vol players just need to get used to the Nikkei and Kospi vol dynamics of this product => SPX vol is being "asianised" if I may say.
    • MG
      Michael G. | Contributor
      6 June 2019 @ 21:48
      Appreciate the balanced response. These products were introduced in the 1990: and initially marketed in Japan. During the GFC, these products contributed to the volatility around the Lehman collapse as that event pushed the Japanese market through the “peak Vega” point Andy describes, leading to a regulatory crush to buy vol. Russell Clark of Horseman Capital put out a good note in 2016 on this topic and is currently very focused on European bank exposures in this area (https://www.horsemancapital.com/marketviews/russell-clark/2016/06/autocallables-volatility-compression-and-eurostoxx). You are correct these products are not “new”. What is different is their extraordinary size and influence on global markets.
    • MG
      Michael G. | Contributor
      6 June 2019 @ 21:49
      Sorry, 1990s, not 1990. They played no role in the initial Nikki collapse, but were important in 2008.
    • MG
      Michael G. | Contributor
      6 June 2019 @ 21:50
      Nikkei! Autocorrect sucks.
    • MC
      Mario C.
      8 June 2019 @ 08:28
      @Michael G.: surprised and pleased you are reading the comments. You are very correct, the first occurrence of these products actually date back from the 90s. But kindly allow me to slightly disagree on the rest. > During the GFC, these products contributed to the volatility around the Lehman collapse as that event pushed the Japanese market through the “peak Vega” point Andy describes, leading to a regulatory crush to buy vol. Not sure what you are referring too. Having lived through these events on a floor, I don't recollect the "regulatory crush to buy the vol". There were blood in most exotic books (not only equity exotics books loaded of these products), as these books are usually short 2nd and higher order risks (covariances, dispersions,...). Just the PnL losses due to dividend curves crash were massive in all books. I don't think these specific retail products had a major role in the volatility of Japan and Korean indices back in 2008: were these indices much more impacted than SP500, Eurostoxx or HSI/HSCEI (which were not part of these retail products at the time)? The vol buying happened simply to comply with management directive to flatten risks and stabilize PnL as much as possible. I think one of the key difference between back then in pre GFC, and now is not the fact these products grew hugely in popularity: for Japan, I actually think size unchanged or smaller (I don't have supporting data though, but for example .N225 notes disappeared from large AM products post GFC). For Korea, I don't think the volume is a factor of magnitude larger (I could be wrong though). I think the largest difference is simply the size of the Equity Derivatives sell side market: the sector has massively shrunk. You used to have 20 or more active players in the Japan EQD market (US IBs: GS, MS, JP, Citi, Bear (gone/merged), ML (gone/merged), BOA,... Eur IBs: 4 French (vs. only 2 now), 4 Germans (vs. only one now)... ), and each of the involved IBs had potentially several large desks, books and traders: vanilla vol, exots, prop, CBs,... . So the risk of these products were directly or indirectly (after several OTC transactions) spread among a large quantity of actors, each with larger risk limits than in post GFC world. So a ~similar exotic retail product market pie and associated risk is now spread among much more concentrated actors/books, which have much less risk limits post GFC: risk tolerance is much lower, and rehedging much more frequent and market impacting... . Sorry for my too long comment. Happy to chat further in real if you happen to come to Tokyo in the future.
    • MG
      Michael G. | Contributor
      12 June 2019 @ 04:12
      Send me a message on Bberg or Twitter. Happy to discuss further.
  • JH
    Joel H.
    9 June 2019 @ 21:01
    Great interview, thank you RV!
  • WM
    Will M.
    8 June 2019 @ 21:55
    Had a great laugh reading the transcript on this one! Some good clangers.... Terra Incognito is "Tara" Incognito. The Japanese Prime Minister whose economic vision is called Abenomics was translated as Abbanomics (perhaps because he is thought by some to be a "Super Trooper".......sorry). The famous Japanese average housewife investor known as Mrs Watanabi is written as "Mrs Watson Obby". But other than that lightheartedness it was an interesting discussion
    • WM
      Will M.
      9 June 2019 @ 13:14
      Like many others on the list I am hoping Chris Cole will be back on soon for an update!
  • RO
    Riskis O.
    9 June 2019 @ 00:09
    Great interview, one of the best out there. As a professional.investment manager looking in this day in day out, I still learnt quite a lot. It is very different from Chris Cole because Andy's view is from.different prospective. I think is rightly so and easier to argue vol is too low and should be higher. But what this video adds value is the market structure and the supply/demand dynamic. Due to these dynamics, market could deviate from fair value for long time. Therefore it is as important to understand these dynamics as to know what is the fair value. Again great interview thanks Mr Green.
  • JA
    James A.
    7 June 2019 @ 02:24
    Solid technical content. Market structure conversations really are the most interesting.
  • PP
    Paul P.
    6 June 2019 @ 21:24
    We need more excellent technical conversations like this on Real Vision. Deep and well done.
  • SA
    Stephen A.
    6 June 2019 @ 16:39
    As a vol trader was very disappointed with this interview. Yes, vol selling is an income augmentation strategy that everybody is now doing - whoop die doo - everybody knows that. It's not 2012 and vol selling is not a new strategy. Chris Cole of Artemis Capital is infinitely more insightful. What he is correct though is that we don't have complete data on vol selling returns since we have not gone through a real recession since vol strategies have came to market.
    • MC
      Mario C.
      6 June 2019 @ 19:24
      Vol selling via retail equity structured product notes started in early 2000s in Japan, Korea: they have been through the GFC recession (ViX complex vol selling is much more recent, and was, except in 2017 maybe, less impactful to the vol market dynamics)
  • MB
    5 June 2019 @ 20:28
    As a vol trader myself (buyer not seller) I found this a great conversation on a topic that is still largely overlooked, with Feb 2018’s spotlight on vol aside. Certainly most regular savers and investors are completely unaware. However, this should scare the hell out of them if they only knew. The distortions in markets now from near desperate yield chasing are mind boggling. The vol selling discussed is just 1 of many desperate approaches scattered through really every asset class. It also is so strange, almost eerie, that almost everyone in finance thinks things now are nuts, everyone expects a blow up, a reset, a new regime etc etc but everyone wants to just get what they can and get out of the market before the you-know-what-hits the fan. I guess if you are on salary or bonus you just ride that years income, take your money, ideally with a performance bonus, and not look back or worry, For anyone trusting their life savings to this though, my god. Either the eventual blowup consensus is wrong and we carry on safely with no massive drama after-all, or the day when everyone wants the exits is going to be written in very big writing in the history books. I’m all for questioning any consensus, but it’s hard to see how this won’t one day be the latter.
  • WY
    Weikun Y.
    5 June 2019 @ 18:23
    Please do more of this type of discussions.
  • PC
    Peter C.
    5 June 2019 @ 05:32
    I think we are going to soon seem some more major volatility moves, disasters / opportunities,.... My dream is an interview of Nancy Davis & Chris Cole with Grant, who can put context & simplicity into this stuff for all.
  • CN
    Charles N.
    5 June 2019 @ 03:04
    This was easily one of the most fascinating conversations I've seen on Real Vision. Bravo! Please keep producing such in-depth content from brilliant interviewers like Mike and interviewees like Andy. Going to watch this again now to try and absorb even more
  • JW
    James W.
    5 June 2019 @ 03:01
    This is in the very best tradition of Real Vision - very educational.
  • TW
    Thomas W.
    5 June 2019 @ 00:22
    Really good stuff. As always Mike is very conscience about how he asks a question and if needed breaks down the response to help those of us who are not around this stuff everyday.
  • TP
    Tom P.
    4 June 2019 @ 21:50
    This is high level content. Great stuff. Thanks for sharing.
  • SL
    Seth L.
    4 June 2019 @ 19:37
    Simply fascinating!
  • RA
    Robert A.
    4 June 2019 @ 18:45
    Volatility Tuesdays!! Love the new Tuesday concentration on a a RV curated topic. I’m a huge Mike Green fan and he delivered an excellent Guest to us (wow—only 29 and a level of sophistication in an esoteric product that is off the charts). I’m talking my book having been in Chris Cole’s Artemis Capital Vega Fund for a few years, but Chris Cole would be a wonderful adjunct to these Volatility discussions, IMO. Chris has been on a couple of times, but not recently....any chance Milton?
    • MG
      Michael G. | Contributor
      4 June 2019 @ 18:50
      Lol... he's not really 29... but he's young. Think a decade older.
  • lD
    lance D.
    4 June 2019 @ 18:30
    ERrrrrrr can you repeat that please
  • DS
    David S.
    4 June 2019 @ 18:13
    It is interesting that the Fed said today that if there is a problem the will help support the market and the market was up 400 points. The Fed cannot push on a string. Cutting the interest rates will not turn the economy around. DLS
  • HJ
    Harry J.
    4 June 2019 @ 17:22
    Ok brain freeze! BG as always great!
  • AM
    Alonso M.
    4 June 2019 @ 17:13
    Awesome interview. If this actually gets to the point where it blows up, I highly doubt anyone is going to realize the blow up is an unintended consequence of central banks manipulating short-term rates to zero for such a long period of time? Instead, some sort of regulation will be put in place as central banks keep rates at (or move rates towards) zero to fight the problem. Sigh.
  • HC
    Howard C.
    4 June 2019 @ 15:12
    Great interview, look forward to seeing this smart gent next year. Hope RV G650 corporate jet will ferry Mike to Austin, TX to interview Chris Cole in this series, "how to get long vol in this environment." The mechanics: options, swaptions, straddles, this is deep subject matter for some of us so thanks to Mike for trying to fill in what are gaps for some of us.
  • JH
    Jesse H.
    4 June 2019 @ 14:23
    This is excellent - just having a hard time following the degree of technical detail and language. Many thanks to Mike Green and to Andy Scott - great interview. And MG excellent as usual - my daily dose of brain training is just trying to keep up with his intellect, lol.
    • JH
      Jesse H.
      4 June 2019 @ 14:33
      Reminds me that RV needs to bring back Chris Cole of Artemis Capital...please.
  • PS
    Paul S.
    4 June 2019 @ 12:32
    Good interview These products destroy people who have no idea what they are buying Asia is still a happy hunting ground for this investor In 2017/18 I saw $TSLA 8% notes sold by Bulge Brackets with 40% downside bail-ins - they are now 60% underwater History will hopefully look down on this garbage - but history in finance obviously doesn't exist 10 years after the last disaster Vale Asian muppets
  • SS
    S S.
    4 June 2019 @ 12:21
    Great interview and great to see the interviewer GOAT Mike Green back. @RV. Someone please interview Mike Green again rather than him being the interviewer.
  • TB
    Thibault B.
    4 June 2019 @ 12:13
    Great interview by Mike Green, yet again! Getting into the detail of market structure change (the Brian Reynolds interview was another) is not something I've seen outside of RV. And volatility as a topic needs to be explored more.... on which note it has been a while since we have heard from Chris Cole :)