TYVIX in the Aftermath of the October 15, 2014 Flash Crash

On Monday, July 13, staff members from the U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission released a joint report on the exceptional Treasury volatility that occurred on October 15, 2014.

The behavior of the TYVIX Index since October 2015 provides a new angle to the story. Putting together the conclusions of the report and the views from the Street, the story is that banks’ paring of inventories of Treasury securities and high frequency trading may have accelerated the pressure from hedge funds that were unwinding short positions in Treasury futures and options. Predictably, on October 15, 2014, as the spot Treasury market was mired in what traders called a “gamma trap” from 9:30 a.m. to 9:45 a.m., the TYVIX Index surged. What is less predictable is the aftermath. First, the flash crash propelled the TYVIX to a higher range. Second, the pattern of variations of the TYVIX changed. As illustrated in Figure 1, the length and amplitude of TYVIX Index fluctuations increased compared with the preceding period. Whatever its roots, the jolt on October 15, 2014 energized TYVIX.

Figure 1: TYVIX On, Before and After October 15, 2014

CS - Fig 1

Last week’s storm is over. Greece got a reprieve, additional U.S. mixed economic data were released, and Fed Chair Janet Yellen confirmed that the Federal Reserve’s target rate for fed funds will gradually increase this year. This seemed to reassure equity, bond and FX markets: the TYVIX decreased by 15%, EUVIX decreased by 12%, BPVIX by 3% and JYVIX by 9%. The 10-year Treasury note yield also declined.

Figure 2: Current Week in Volatility

CS Fig 2 FIxed


In spite of this week’s volatility decline, the TYVIX Index still is above its values set in April 2014, when the index started to turn upwards. Interestingly, TYVIX has since underestimated the realized volatility of 10-year Treasury note futures. See Figure 3.

Figure 3: Expected Less Realized Treasury Volatility

CS Fig 3

Prices of TYVIX futures followed the same course as the TYVIX Index and fell throughout the week. As of the open on Friday, July 17, 2015, October 2015 TYVIX futures predicted average Treasury volatility of 5.80 in November 2015.

Figure 4: TYVIX and TYVIX Futures Pricing

CS Fig 4