Stock 'fear gauge' flawed, Citi equity trading chief says

Wed Jul 10, 2013 5:51am EDT
 
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By Simon Jessop

LONDON (Reuters) - Investors seeking to predict the magnitude of share price moves at times of market flux may get a faulty steer from a closely watched "fear gauge", one of investment banking's top equity traders has warned.

Citi's C.N Mike Pringle, global head of equity trading at the third-biggest U.S. bank, told Reuters that the VIX volatility index .VIX, is now as much a traded asset as it is a guide to investors seeking protection from losses.

The VIX reflects Standard & Poor's 500 .SPX options prices and, therefore, expectations of future market moves. The idea is that as people become fearful of losing their money, they are more willing to buy a put option as protection.

At the moment, it remains at very low levels.

"A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it's an asset class and it's more traded for yield than protection," Pringle said.

"The growth of structured products around VIX drove that move. In most cases, the VIX is sold to generate yield but during some stress periods, the weakness in the spot level triggers significant computer-generated technical buying from these products," he said.

The VIX is widely followed as an indicator of investor sentiment, although there has long been debate over its efficacy as more financial instruments are derived from it.

"It's still relevant in extremes, but not in a normal functioning market," Pringle said.   Continued...

 
A businessman walks past a Citibank branch in Tokyo November 18, 2008. REUTERS/Yuriko Nakao