Volatility futures Market Making software
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I'm trying to figure out how to MM vix-like futures
from a modelling perspective, speed is the next problem after that.
well, vix index has a spec and the computation is available. a future takes into account cost of carry. Replication and arbitrage free approaches are the easiest
you can't use arbitrage-free replication, you can use some approximation with limited set of options in practice.
relating to enterprise MM software I wanted to see how that "computation" of vix futures vs portfolio of options
is working
VIX futures have so many applications in professional finance that it is probably never purely traded against a portfolio of options. Think about how many OTC exotics are priced against VIX term structure...
As mentioned, there is not a single piece of software - and I used a few in my carreer - that has VIX futures pricing models set as standard.
I may mistunderstand the thesis about "standard models", but if you're using vix futures for other products - yes, you just taking futures prices from market.
I mean trading that futures from a dealer/MM side.
maybe look at variance swaps and realized vs implied volatility. that was in vogue 20 years ago
From my experience you usually don't exclusively quote VIX futures as a solo market. You have an extremely diverse portfolio of different nonlinear instruments that you probably have to hold into expiration and quote VIX around your greek limits.
And those limits are derived from your own models and your inventory
It's a nice extra, not a staple market. I mean look how thin it is compared to all the equity vol that is traded.
I feel it in similar way.
I think that it's better to convert a position in VIX futures into some "phantom" position
in set of options (where counts are dynamic, gradually changing in time
) at many many tradable strikes, and analyse it together with portfolio of options,where your firm is also an MM.
So being a VIX market maker is interesting when you're a plain vanilla option market maker.
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exactly that. Imagine you tried to make a market in VIX and every time you get hit you'd have to trade an entire portfolio of options to hedge...you'd get killed in slippage.I feel it in similar way.
I think that it's better to convert a position in VIX futures into some "phantom" position
in set of options (where counts are dynamic, gradually changing in time
where your firm is also an MM.
So being a VIX market maker is interesting when you're a plain vanilla option market maker.
The other way around, you already have a massive position with thousands of terms and strikes and you have a little excess vega 6 months out...well, you might as well post an offer in VIX