For whatever reason, traders today accept more risk and less potential reward. If this was simply a new paradigm based on the features and benefits of new credit derivative products, then so be it.

What I cannot accept, however, is that traders, unaware that these new derivative products are based on old beliefs, which no longer hold water, are taking on unacceptable levels of risk.

For example (and this will be strongly disavowed by industry professionals), the concept of the credit ring," where domestic regulators had full oversight over the participants of almost every trade, and could cause a trade that settled in T+N days to fail" based on any number of issues, is no longer the case (as I see it).

Years ago, if a bad trade was cleared and settled, it could still be unwound as domestic U.S. regulators had control of all banks and their accounts. In other words, money didn't/couldn't go missing.

But today, with the shorter time to clear and settle securities trades, with the increased percentage of cross-border trades, with the increased size of the transactions, and so forth, it is a fact that money can go missing, or at least unrecoverable.

What laws, what regulations, are in place to immediately resolve international disputes?

So, as the trading game gets super-sized, probably because of new risk management tools, I believe that the controls over participants in a global marketplace have not kept pace.

Moreover the quality of the market's participants has declined significantly as trading has moved from face-to-face dealings to one now of trading with the enemy, trading electronically with unknown/unseen persons, and trading with digital systems that can be hacked.

In my article yesterday, I noted that maybe the change in VIX is not so much of a conundrum as it is a paradigm change. I embrace change, and I am not so unhappy that the VIX indicator is not the high quality technical indicator it used to be for me. But, I also pointed out that the credit ring could be deliberately broken today by crooks who enter the trading game with the flat-out intention to steal assets.

Indeed, the level of theft could be so great as to render the capital markets useless unless all trading becomes a matter of transactions made between one Humungous Bank & Broker and the next.

Is that the direction we want to go? Of course not, but maybe it's the only way.

As further comment on the VIX conundrum", I received this reader mail today:

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Bill, I have heard several explanations as to why the VIX has been under pressure for the past few years.

One reason, which I think you allude to, is that investors have been taking on more risk with less reward because of low interest rates, heightened competitive pressures and increasing complacency. This means they have been shorting volatility outright, or as part of a covered call transaction, to earn incremental returns that don't really make economic sense in the long run.

In addition, there has been substantial issuance of convertible debt and other securities with an "optionality" feature in recent years. At the same time, there been dramatic increase in the number of hedge funds and others who trade these instruments and hedge them via the listed options markets, which has tended to put pressure on premium prices.

Regardless, if you (and your visitors) want to read another interesting and enlightening article on LTCM, I would recommend this one."

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In addressing the VIX issue, and not my own concerns, I understand that VIX is a measure of how volatile future markets will likely be, according to the participants themselves. As the next reader comments, there has been a revolution in risk management, and I understand that as well.

I do not understand, however, how so many capital managers today can honestly believe they can trade out of situations caused by extreme events, such as the Kerkorian bid for close to a billion dollars worth of GM stock at very high prices, or a Crude Oil contract that could zoom or collapse, or a major dump of USD by an Asian Pacific central bank, and so forth.

The fact is that some (many?) probably can't, and will fail.

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If you're truly interested in why the VIX has been so low and has remained low for a long time now the answers are pretty simple, and have been pretty well known for a while.

Over the last 6 years or so there has been a revolution in risk management due to the real time communications that's evolved. Where as recently as 4 or 5 years ago the firms that made markets in options had to cover all the pits on all the exchanges and manage those trades and traders individually. In this day and age dispersion trading strategies" fueled by the ability to see trades made in the pit instantly at a globalize central risk management center as opposed to having to wait for the exchange to manually enter those trades into a system and then have them dumped into the firms system, allows risk managers to trade options in a sector vs. each other and ultimately spread them vs. the S and P. What naturally occurred then is that the large firms sell the SnP options vs. being buyers of individual options on the stocks in the SnP. This phenomenon originally began with pairs trading in the late 1990's and has evolved to the point where options on individual stocks are traded in a matrix vs. the sector indexes they make up and those sector index options are managed vs. the options on the broader indexes which in turn are all managed vs. each other.

The proof is simple, look at how few firms are left making markets in these options products on all 6 options exchanges. Where once firms like SIG needed people all over every floor to dominate the markets, they now do it with a fraction of the staff simply because of electronic access, global communications and global centralized risk management. There individual positions are all now managed in a matrix of like stocks and those matrixes are then managed vs. each other.

As far as the movement of capital off shore is concerned it has NOTHING to do with the original question posed about the VIX. Does it happen? Sure it many cases it does. No fund will be providing returns for its holders if they're stealing all the profits for themselves. They won't be around long doing that. It really appears they you're just having a rant about something that's not really going on to the degree you think.

Oh by the way the VIX was never intended as a technical indicator. LTCM went down because they were flat out wrong in their calculations. The Black Scholes model had flaws which surfaced which were specific to the exotic underlyings they were applying it to. That particular model is accurate enough for standardized equity options but its not been used in more complex options for a decade."

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I cannot take exception to a single thing this reader has written, except possibly one.

I believe that almost every hedge fund, and mutual fund, in the marketplace today is well intentioned, and competent. Despite my continually pointing out their deficiencies in market performance, compared to the indexes, I have never suggested otherwise.

In fact, I'd like to see hedge funds and mutual funds brought fully under a unified global regulatory umbrella, so that the public had access to a great many more expert capital managers.

And, rather than rant," all I have been pointing out is that it takes just one or two bad intentioned parties to bring down a capital market that traders (for all the reasons my readers have pointed out), consider today to be much safer, and less subject to extreme volatility, than the days (1994-1997) of LTCM.

This is a point of view, not a rant.

The definition of rant is one who expresses anger, or incites others to be angry.

About VIX, I did not rant. About Stelco, well that's a different matter. ;-)

In any event, I appreciate the comments of these two readers, and welcome more like them. I think these are important issues, even if, as the second reader pointed out, they may be different ones.