By Saqib Iqbal Ahmed
NEW YORK (Reuters) - The sharp drop in U.S. stocks earlier this week, which led to the liquidation of two popular exchange-traded products (ETPs), was not caused due to volatility-linked securities, Cboe Global Markets Chief Executive Ed Tilly said on a call with analysts on Wednesday.
Monday's volatility shock in U.S. stock markets had led to some misconceptions about the Cboe Volatility Index, known as the VIX (VIX), and related exchange-traded products (ETPs), Cboe's Tilly said.
"The market drop caused a spike in realized volatility and in turn risk was repriced. It's important to note that products linked to volatility do not cause volatility," he said.
Tilly was speaking on a conference call hosted by Cboe to address concerns around market volatility in the aftermath of Monday's historic hit to stocks.
The S&P 500 Index (SPX) slumped more than 4 percent on Monday while the VIX index - Wall Street's so-called fear gauge - registered its largest-ever single-day jump.
Investors using ETPs linked to the VIX were pummeled and two banks, Credit Suisse Group (S:CSGN) and Nomura Co Ltd (T:9716), said on Tuesday they would terminate two exchange traded notes that bet on low volatility in stock prices.
Some market participants blamed Monday's late-day stocks meltdown and the after-hours futures rollercoaster on the massive unwinding of short positions in volatility-linked ETPs.
Tilly said he expected investors to continue to use short volatility strategies in the future, noting that there are many other ways for investors to express a short volatility bias without resorting to VIX-linked ETPs.
The liquidation of the VIX-linked ETPs has left many retail players smarting from big losses and led to calls for more regulation.
Cboe Chief Operating Officer Chris Concannon said it was likely that regulators would take a closer look at these products.
"Whenever you have these events where you see investors harmed by a liquidation event, there is going to be a great deal of regulatory scrutiny," Concannon said.
"Really the scrutiny will be around how they were sold and who they were sold to," he said.