CBOE Bets On Volatility Trading

The bourse sees opportunity and growth in volatility trading in 2014 by introducing new products and expanding extended-hour offerings.

Leveraging the popularity of its CBOE Volatility Index (VIX), the Chicago Board Options Exchange closed 2013 with a spate of activity that has included introducing several new volatility products and expanding its trading hours to accommodate European trading. That activity is set to continue into the coming year, beginning in the first quarter with the launch of weekly futures and options based on the exchange’s new CBOE Short-Term Volatility Index (VXST).

The popularity of weekly instruments has taken the derivatives market by storm, with Tabb Group predicting that weeklies will make up 25 to 30 percent of derivatives trading volume by the end of 2014.

“Short-term instruments have seen tremendous demand in the derivatives world over the past several years, particularly in the U.S. options market,” said Tabb group analyst Andy Nybo. “There has been tremendous demand from the investment community for a shorter-term product to allow them to more finitely manage their exposure.”

The weekly options and futures will be listed on the VXST, a nine-day version of the popular 30-day VIX. First introduced in October, VXST was created specifically to pave the way for weekly trading of volatility contracts.

“We talked about bringing up weeklies on the VIX, but the smart people from whom we seek counsel advised us it would be better initially to bring up weeklies on an index that looks to volatility only seven to nine days out,” said Ed Provost, president and chief operating officer of CBOE Holdings Inc.

VIX, which is a measure of expected volatility based on S&P 500 options prices, has seen consistent growth since it was first introduced in 2004, and continues to post strong numbers. VIX options had an average daily volume of 565,000 contracts for the third quarter of 2013, representing a 21 percent increase over the third quarter last year. VIX futures, with an average daily volume of 160,000, rose 48 percent over the third quarter last year. By combining the popularity of its VIX product and strong industry demand for weekly instruments, CBOE expects the soon-to-be-launched VXST weeklies to be as close to a sure hit as it can get.


Meanwhile, the number of volatility instruments available for trading during the exchange’s new extended hours is also set to expand. Currently, only VIX futures are trading in the extended hours sessions, but CBOE eventually plans to add VIX options as well as options on its S&P 500 benchmark index, SPX.

CBOE expanded its trading hours in two phases this fall, first with a 45-minute extended session beginning at 3:30 p.m. Central Time, following the close of CBOE’s regular trading at 3:15 p.m. In November, the exchange added an additional five-hour session, beginning at 2 a.m. Central Time and running to the start of regular business hours at 7 a.m.

Provost says the CBOE doesn’t have specific data on overseas demand because when trades are executed through brokers and cleared through the Options Clearing Corp., their point of origination is hidden. Nevertheless, for years now the exchange has estimated that demand from overseas was significant.

“Our proprietary SPX and VIX products have a much more international appeal because they are tied to the S&P 500, which is a standard for measuring the performance of U.S. markets but is also a barometer for global markets,” Provost said. “Portfolio managers around the globe use SPX and VIX to increase and decrease their exposure to equities or volatility, especially if they are managing global portfolios.”

One measure of international interest is that VIX methodology has already been licensed to nine exchanges overseas. Australia recently brought out VIX futures contracts based on an index of stocks on its exchange. “Trading of volatility has become a worldwide phenomenon,” Provost said.

Meanwhile, while no timetable has been set, CBOE continues to gauge demand from overseas investors in Asian markets and is weighing plans to expand hours further to better serve that market as well.


Change and expansion inside a powerful exchange don’t come without cost, and CBOE has made public its plans to significantly step up its investment in technology in 2014, particularly in light of recent industry glitches, as well as its own outage back in April, directly attributed to work being done to the systems to expand trading hours. That outage, which delayed the original date for when extended trading was introduced, prompted a thorough test and review of systems.

This fall, CBOE has been an active participant in industrywide discussions about strengthening the market infrastructure that were arranged following Nasdaq’s outage last summer. In reaction to these high prpfile events, CBOE is designing its IT budget to accommodate both its specific growth needs and anticipated changes that might result from industry discussions.

Provost noted that during the third-quarter earnings call, CBOE reported guidance of between $33 million to $36 million for capital expenditures in 2013, which was almost entirely technology spend. For 2014, the company has acknowledged it will spend “a hefty amount above that but not double,” he said.

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