not watched over by machines of loving grace

I see that some of the people that were betting on the indexation of volatility came unstuck last week. Not forgetting that many regular equity investors also lost money.

Credit Suisse handled one of the exchange traded products central to what happened and which was once worth $2.2bn, although last week it lost 96% of its value during the equities sell off, before being declared defunct. Nomura had a similar product which they also shut down.

Neither bank will have been directly affected by this, being merely the facilitators of the products and consequently only accepting their 'that'll do nicely' margin on all of the transactions involved.

It reminds me of that movie, The Big Short, where complex bundling was used to hide dodgy products, until it all unwound. I suppose it illustrates that the slippy money just gets moved around to the next big scam whilst the real effects of the losses drift through into pension funds originally designed to support average working folk.

The guy who wrote the original book of The Big Short (Michael Lewis) also wrote Flash Boys, which is the one about High Frequency Traders. It describes the people who trade in the microseconds of volatility during share disruptions using ultra fast computers on fast links close to the main exchanges. The principal is like that rigged betting used in the movie The Sting, only this version is legal.

Now there's an ironic twist as the listed values of these HFTs are themselves rising. Companies like Virtu and Flow Traders are seeing short term gains in their own listings. A kind of 'meta cubed' level of redirection. Betting on the companies that trade on the volatility of the markets created by exchange traded products failing.

Something else trips into view with all of this. The volatility index (Vix) which was another catalyst in the week's big sell off. More than it being a lagging indicator, there's allegations that trading firms with sophisticated algorithms could manipulate the Vix up or down by posting quotes on S&P options. If true, they wouldn't even need to trade or deploy capital but could cash in on shorts against the falling equities.

But its all quite sophisticated stuff, muddied further by machines running much of the buying and selling. We are still some way from Richard Brautigan's
cybernetic forest filled with pines and electronics where deer stroll peacefully past computers as if they were flowers with spinning blossoms.