CEOs could be hit by Volcker rule

A few months ago, "Poisonous Pen", the anonymous author from Mondial Money, told his readers to jump into the VIX (CBOE Volatility Index — the so-called fear index) on the basis that prevailing levels could not continue.Those who followed his advice are rejoicing. If such advice had been taken, you would have doubled or trebled your money over a matter of months. Further, if you had followed wholeheartedly and bought derivatives, you might have enjoyed a ten-fold increase in your money! Yup, there are sophisticated risk-takers out there making money in these turbulent times!Of course, those followers will also know that Mr. Pen leans towards the "schadenfreude", defined as those that delight in the troubles of others. Yet, for Mr. Pen, the "delight" is all about price delights. Things that are normally at price X, but through a simple set of events have become price half-X, and are likely to provide a trading opportunity. If we write more than normal about Mr. Pen this year, it's because events have been more-than-normally creating wild price deviations.The "disclaimer" then, has to be that, Mr. Pen's advice is at the riskiest end of any risk table a regulator might piece together.Back to The VIX. The advice was delivered when prices prevailed at 15 to 18 points, and you would have been following the screens daily as it bounded in the general direction of 40, spiking at 50. As Pen says: "Without bragging, we would suggest that this move alone can be your investment for the year. This ship has sailed now"Well here is the heart of today's piece: for Mr. Pen "tranquility" or apparent stability in financial markets is gone for good. So when everyone else returns to normality, say the volatility index reverts to levels of 20 or thereabout, go back into 6 to 12 months volatility indices and wait for the crowd to get back on their horse and cause havoc. When the VIX hits, 50 sell. When the VIX retreats to around 20, buy. This should be a permanent feature of your portfolio. What a great world for rational investors with patience and the attitude that the misery of others can be our gain.An interesting thought. For the theme to work, Pen needs to be correct about the assumption that markets will remain volatile. His case for continued volatility is based on the view that there are increasing amounts of short-term traders who over-react. To Pen "this has a lot to do with the fact that most people cannot see further than their nose and feel intensely comfortable with this perspective. If enough think and act in this way, short-term movements become predictable — so they think".Data tells Pen to understand that about a quarter to a third of the market is driven by trading. These short-term reactions get compounded by programme trading and trend-following and other quantitative models. That is another third to half of the market. "Before you can fully enjoy a cup of espresso, prices are moving and every one blames overall economic uncertainty or external factors or just released economic news that are above or below expectations. What a zoo for the minority of true investors" concludes Pen.Pen acknowledges studies seeking to demonstrate that traders and trading systems reduce volatility but dismisses the content because "we investors are focused on investment results and the realities do not align well with these academic studies".So Pen believes volatility will be a frequent part of the future: "we simply look at this elephant financial world with the eyes of a mouse and conclude that it is all well and good to say if we (elephant and mouse) got together, our offspring would be of average size — the argument of the academics — but somehow the process of getting there looks rather traumatic at least for one of us. So, we stick to our kind and subscribe to the view that a lot of different and bad news in the world cause market movements and that the sum of these movements results in volatility".