Last Saturday, we reported that with VIX at 9, Interactive Brokers surprised many when announced it would raise volatility margins anticipating a VIX shock. This is what the brokerage said:
VIX has established new all-time lows over the course of the past month. The price dynamics of that product are such that it can have very large relative price increases over a very short period of time base on news and other market factors. In recognition of the special risk of sudden, large increases in market volatility, that is inherent in Volatility Products such as VIX, Interactive Brokers will put into place greater margin requirements for Volatility Products after expiration processing on Saturday, 19 August.
IB was also surprisingly clear in what it anticipated
IB’s margin policy will be to consider market outcome scenarios under which VIX might rise to a price of 18 (even when it is currently priced much lower) and under which the other Volatility Products could rise to proportionately similar degrees.
As we summarized, “In other words, IB is starting to prepare for the day that the VIX doubles from current levels.” Less than a week later, Interactive Brokers was proven right when VIX hit 17, nearly hitting its bogey. We also pointed out something else:
Of course, since volatility is the “fulcrum security” of today’s reflexive market nature – does a surge in the VIX send stocks lower, or does a market crash lead to a VIX surge? – the very fact that vol-linked leverage is about to be aggressively cut first by one, then by many more if not all exchanges, as we head into the critical for volatility fall period, these warnings could create a self-fulfilling prophecy whereby the margin increases are the very catalyst that leads to a surge in volatility. Whether that is what happens over the next two weeks remains to be seen.
It was “just seen”, because after yesterday’s near historic spike in vol, as we expected others are starting to do precisely what Interactive Brokers did first, and on Friday morning Saxo announced it too would hike its minimum margin rate on both Korean stocks, for obvious reasons, and on Inverse VIX ETFs, sending them to 40%, in the process forcing clients to put up substantial margin or else be forced to close out of short-vol trades.
Here is Saxo:
Due to the growing tension between North Korea and the USA, we are increasing FX and CFD margin rates on Wednesday 16 August 2017, at 08:00 GMT, to reduce your risk against the potential high volatility, rapid price movements or market gaps that may occur in case of further political escalation.
And some parting “advice” from Saxo:
How does this impact your trading?
If you have open positions in any of the affected markets, please ensure that you monitor their positions carefully and maintain sufficient funds in your account to meet the increased margin requirements during this period of turmoil. We would like to recommend to keep the following in mind, especially when trading during periods of potential market volatility:
- Consider placing relevant resting orders in advance. Market liquidity may vary substantially, and trade/quote requests may be unavailable at times as existing resting orders and new market orders are filled as priority
- Market orders are not guaranteed to be filled at any specific price – they will be filled “at best” according to available market price when processed
- Stop Loss orders are converted to Market orders once triggered, so are not guaranteed to be filled at your stop order level – gaps in available liquidity can result in significant slippage on Stop orders
- Using Stop Limit type orders (rather than Stop Market) can be very beneficial as they allow the client to specify the worst acceptable immediate fill rate after triggering, and they will rest in the order book if not able to be filled immediately
- Buying options (i.e. puts to protect long positions and calls to protect short positions) could be a hedging vehicle suitable for market uncertainty since they offer protection at the fixed Strike price, rather than Stop orders where fills on gapped prices can occur
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