The $300 billion structured notes market is quietly amplifying US stock declines
When worst-of auto-callable notes linked to the S&P, Nasdaq, and Russell indexes stop knocking out on schedule, dealers are forced to dump volatility exposure simultaneously, just as market-makers willing to buy it back are shrinking.
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Structured notes are a hidden technical current in the market
The episode opens by positioning structured notes as a technical flow separate from fundamental narratives—whether AI stocks should rise is one question, but what actually drives near-term prices is the forced hedging action when derivatives positions like structured notes expire or knock out. The hosts mention Nvidia's credit default swaps recently ticked slightly higher, a sign of market ‘high-frequency tremors’; this is why they dedicated an entire episode to structured notes.
— JoeEssentially, a child of bank deposits and derivatives
Alex defines it this way: you give the issuer your money, forgo interest, and take on their credit risk; the bank then uses the ‘forgone interest’ to buy and sell options, customizing the return shape you want—bullish participation, downside protection, or the more common ‘yield’ structure, where the bank sells you a put option and wraps the premium into coupon payments. Three approaches can be freely combined; the bank is like a chef, cutting the same option ingredients into different products for different clients.
— Alex MichelizziUS structured notes hit $300 billion this year
SEC-registered structured notes in the US are on track to reach roughly $300 billion in issuance this year, versus about $200 billion last year. The fastest-growing category is worst-of auto-callable notes linked to the S&P, Nasdaq, and Russell indexes. The reason: Russell has basically flatlined for years, but since last year's ‘liberation day’ it's been climbing, causing notes that should have knocked out repeatedly to keep extending, their size rolling larger.
— Alex MichelizziFalling markets force dealers to dump volatility exposure all at once
When markets climb early in the year, notes knock out frequently and roll forward; dealers' hedge positions self-clear in a virtuous cycle. But once markets turn down, notes that fail to knock out start piling up, dealers' vega exposure (sensitivity to implied volatility) balloons, and just then the off-market counterparties who had been hedging pull back because their own portfolios are shrinking—fewer buyers step up. This is the ‘spot up, vol up’ pattern Charlie McElligot and Nomura colleagues observe playing out in the structured notes market.
— Alex MichelizziSingle-stock notes use daily observation, flipping exposure on and off
Tickets linked to individual stocks pursue higher coupons by adding ‘conditional coupons’ (skip payment if the stock falls too far) and daily-observation knockout features, letting the product terminate almost any day after an observation window. The result is that banks' risk exposure becomes extremely binary: once a stock bounces, knockout fires instantly, vega erases; once it falls, the bank instantly holds a full short put position. Markets thus see a ‘either have vega or have none’ on-off pattern instead of smooth change.
— Alex MichelizziTwo-year notes can be forced to extend to five
Worst-of notes typical in US markets carry nominal 3-to-5-year terms but dealers hedge on a 2-year expected life. Once indexes fall and notes refuse to knock out, actual duration can stretch to five years; dealers' hedges, built for 2 years, suddenly have to cover an extra three years of vega exposure. Conversely, if an index then rallies back near all-time highs, dealers find they still hold 5-year hedge shorts, but the note knocked out in three months—this structure is called ‘peak vega’ internally.
— Alex MichelizziOne stock's early surge knocks out entire basket notes instantly
Alex highlights what he calls the most creative design: a three-stock basket note where if any one stock rises 20% on day one, no matter how the other two perform, the product knocks out immediately. If the leader then crashes while the note already knocked out, that deep-in-the-money put position evaporates—the bank thus holds a position extremely sensitive to ‘vol of vol’ (volatility of volatility): the moment all three stocks rise, risk disappears; the moment one lags, the bank faces a major short put that can vanish any time.
— Alex Michelizzi2018's lessons spawned a new generation of product designs
Alex notes that innovation in structure often starts from real past losses. In 2018, a batch of dealers took heavy losses in ‘slow grinding down’ conditions—not a crash or a non-event, but a modest decline that never fully compressed, so hedges kept misfiring. The market then designed new-type notes to handle that middle ground—‘fall a little but not through, knock out even if stopping in a zone’—but new designs bring new second-order problems.
— Alex MichelizziIn their own words · checked verbatim
My personal preference is I like to describe it as like a bank deposit or a bank IOU. I don't know if they like met a derivative and had a baby. This is what it would be.
Alex Michelizzi3:05
I think SEC registered notes this year are on track to hit about 300 billion versus approximately 200 billion last year.
Alex Michelizzi8:15
we're like, we're like one and a half percent, I don't know, from an all-time high. It's kind of, the stock market's doing fine.
40% annualized yield. That's pretty sick.
In all fairness, we haven't really seen a down market where those books have been there.
Alex Michelizzi41:10
I now have this, this way in the money put, which can disappear very, very quickly. And so I've got this massive vol of vol position where If everything just rallies now, it's done. I need everything to fall.
Alex Michelizzi44:17
you got paid in retrospect, sitting here in 2026 for basically the last 45 years, you got paid a lot of money to just invest in the market and do nothing, right?
Joe48:21
Figures
| US SEC-registered structured notes annual issuance (2026 est.) | $300 billion | 8:15 |
| US SEC-registered structured notes annual issuance (prior year) | $200 billion | 8:15 |
| CoreWeave-linked structured notes annualized yield | 40% | 33:01 |
| S&P 500 distance from all-time high | ~1.5% | 24:54 |
| Semiconductor ETF drawdown from peak (host estimate) | ~10% | 39:07 |
| Typical knock-in protection floor | Index drops 40% to trigger full downside participation (60% strike) | 13:25 |
Glossary
- Vega
- An option's sensitivity to changes in implied volatility.
- Gamma
- A hedged position's sensitivity to the speed of price changes, determining urgency to chase gains or cut losses.
- Auto-callable
- A structured note that terminates early and pays a coupon if on an observation date the index exceeds the starting level.
- Worst-of
- A structure where payoff or loss depends on the worst performer in a basket of underlyings.
- Knock-in/Knock-out
- Clauses that trigger or terminate a feature only when price hits a preset level.
- Uridashi
- Japanese offshore fundraising structured notes, a high-yield category that emerged after Japanese interest rates hit zero.
How to listen
Anyone tracking US equity or AI stock valuations, derivatives traders, or investors trying to understand how structured products amplify market swings.
Minutes 11-19 (Greeks definitions: delta, vega, gamma terminology) can be skipped.