If there is one thing traders have learned from the past decade, it is that the VIX, or “fear” index as it is still incorrectly called in various financial outlets, has become especially meaningless when measuring market nervousness whether because it is manipulated outright (here, here and here), due to anticipation of central bank intervention following every market crash drop keeping a lid on volatility, or simply because we live in a world in which even the algos have realized the tail wags the dog (with lots of leverage) and instead of buying risk assets, they are selling volatility futures instead.
Furthermore, as Goldman recently explained, the increasingly erratic moves in the VIX are an indication not only that “something is not right”, but that “liquidity is the new leverage” in a world in which central banks and HFTs have soaked up all liquidity precisely when it is most needed.
Recall what Goldman said two weeks ago:
One conspicuous consequence of post-crisis evolution is that trading volumes in many markets are now dominated by high-frequency traders (HFTs). While bid-ask spreads and other indicators of trading liquidity appear to indicate liquidity has improved in markets where HFT has grown, the quality of this liquidity has not yet been stress-tested by recession. The recent experience of the “VIX spike” suggests there is good reason to worry about how well liquidity will be provided during episodes of market distress, and this is only the latest example of a “flash crash”. Regulators and researchers increasingly warn that HFT strategies can contribute to breakdowns in market quality during periods of distress.
As for those macrotourists who still diligently explain to anyone who bothers to listen how central banks have little impact on risk assets, and thus the VIX, and how the record low VIX is the result of decimalization, best of luck with that.