"Someone Big Was Utterly Blown The F**k Out": Here's The Reason Behind Today's Unprecedented VIX Move

There was a bizarre moment this afternoon, when in the 40 minutes heading into the final hour of trading, the VIX kept rising and rising, preventing the S&P from doing its sworn duty of spiking higher into the weekend. And then, just after 310pm ET (or 1210 PT), the VIX collapsed, plunging by as much as 14 vols from 54.39 - the highest print since Lehman - to 40.84, the low for the day, and unleashing another unprecedented stock buying cascade, which almost sent the Dow green. 

What happened?

As the following chat session between three individuals, which includes a former CME index option trader (X), all of whom wish to remain anonymous lays out, what happened is that the VIX ramped as a major Chicago market maker was caught in the infamous gamma short squeeze, which forced them to keep buying the VIX as the VIX soared, in the process ending the VIX even higher, only to get margin called out of their position by their clearing firm, puking their entire position while liquidating anything they could, and unleashing the VIX selling avalanche and the 700 Dow point rally.

Regular readers will recognize this pattern: it is what happened, only not with the VIX by ES, back in February 2017, when the Catalyst Hedged Futures Strategy Fund pushed the entire market higher when it, itself, was caught in a similar gamma trap (and which this January was finally busted for fraud).

Below the the full chat laying out what happened:

X: Someone got carried out of the pit in spx options 15 minutes ago

X: Utterly blown the fuck out

X: Their clearing firm literally liquidated some big market maker in Chicago hahahaha

X: Go to Ceres today

Y: Omfg

X: Someone big literally doesn't exist anymore

X: WE'RE RUINED MORTIMER

X: It caused a huge dislocation in the vix

X: You could see them blow out 😂

X: God i feel so happy now

X: (Ssssiiiippp)

Z: Someone hacked into this Boise publication and is posting redpills on their Twitter

Z: [link to Boise Weekly hacked twitter account]

Z: Is one of those degenerate leftist weekly publications so common in urban areas

X: Lol nice

Z: What's going on with the spx?

X: Bro

X: What a lollercoaster

X: Im in cloud 9 right now

X: My old he lush trading firm blew out vs vix 32

X: Now someone else the same size did it vs 48 haha

X: Old hellish*

X: Consolidated trading blew out vs vix 32 last week

X: Verifiable true

Z: Do you know the other firm?

X: I wanna say they were the 4th largest market maker in chicago

X: Asking my friend. Trying to find out

[pictures of VIX vs /ES[H2O] on TOS]

X: That dramatic rise in the vix is inconsistent with the speed and depth of the fall in sp500

X: Someone literally got liquidated around 3 eastern

X: [Z] tell them about consolidated trading

X: "Consolidated Trading was well known across Chicago as degenerate risk takers who would always maintain a short vol/gamma position regardless of market conditions. Finally bit them in the ass last week and they blew out even after the market gave them tons of opportunity to get flat or long vs vix 23"

X: [Screenshot of another chat he's in]:

Q: Vix 52

Q: 14 day vol is 60 lol

Q: Bro

Q: Someone big in Chicago just got carried out of the pit

Q: Their clearing firm mega puking them out CAUSED A SEVEN POINT POP IN THE VIX

Q: Reversed in minutes

Q: MORTIMER WE'RE RUINED lmfao]

And that's what's behind 700 point ramp today, confirming that the only movie one needs to watch to understand how the market really works is Trading Places.

Investors are practically begging the Fed to cut rates again as coronavirus threatens the economy — even though the central bank just did

• Markets are calling for lower interest rates even after the Fed handed down an emergency half-point cut on Tuesday to combat coronavirus' potential impact on the US economy. 
• Seventy-eight percent of traders think the Fed will cut another 50 basis points, while nearly 22% think there will be a 25-basis-point cut at the next meeting March 17-18, according to CME's FedWatch tool. 
• "Everything is on the table," James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg TV in a Friday interview.
• Read more on Business Insider.

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The market is screaming for interest rates to fall even further just days after the Federal Reserve issued its first emergency cut since the financial crisis. 

The central bank slashed interest rates by a half percentage point on Tuesday to combat the potential impact of a coronavirus outbreak on the US economy. But markets didn't react positively to the move — stocks continued to fall, and investors rushed into safe-haven assets sending yields on long-term US Treasury bonds down. 

On Friday, yields on both the 10- and 30-year US Treasury bonds fell to record lows, a sign that the market still thinks fiscal policy is too tight. Traders are betting that the Fed lowers rates even further at its next meeting March 17-18. As many as 78% of traders think the Fed will cut another 50 basis points, while nearly 22% think there will be a 25-basis-point cut in March, according to CME's FedWatch tool. 

That could bring the federal funds rate to between 0.50% and 0.75%, down from where it currently stands between 1.0% and 1.25%. 

The central bank appears to be listening to investor concerns. "Everything is on the table," James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg TV in a Friday interview.

"We are willing to do more. But we are monitoring the situation. We can meet at any time," he said. 

While there are "downside risks to growth" associated with the potential for a coronavirus pandemic, markets seem to be pricing in the worst-case scenario, Bullard said. There are positive signs that the situation in China is stabilizing, meaning that its economy could return to normal in the second quarter of the year, he said.