Flows & Liquidity “Team”: Cem Karsan
Structured product flow is “pinning” the SPX (Karsan). But interest rates are breaking out. Who wins?
Discussion
I’ve listened to Karsan’s public commentary for a good while now, and have gone back and listened to a lot of his prior commentary. His latest interview is just the second time I’ve seen him really highlight the impact of the structured product market on the volatility market. The way he explains it is with a 5% Fed Funds Rate, market makers are able to craft products with 10-15% returns as long as the SPX remains in a call it 20% range up/down. To create those products MMs need to sell vol. That all makes sense to me, but my question is how long can structured product flow keep SPX pinned while the long end of the interest rate curve breaks out?
My guess is neither force “wins” in the short term, but rather keeps SPX in a range until recession hits…unless of course an even larger force shocks the market out of its range to the upside or downside. The downside surprise could be Financial Crisis 3.0, and on the upside a surprisingly strong earnings season could do it, but more likely something along the lines of the end of the Russia-Ukraine war.