Wall Street’s ‘fear gauge’ is going global. After success in the US, where betting on share price swings has become firmly established, the Chicago Board Options Exchange is rolling out its Vix equity volatility index into new markets.
Ed Tilly, the exchange’s chief executive, says that, while the CBOE’s main focus is on its home market, it has taken a big step towards making the Vix, which reflects S&P 500 options, the global measure for expectations of market place volatility. It recently expanded trading in futures based on the Vix to 24 hours a day.
“We’ve just begun over the past two years to really ramp up the international story that the global proxy for volatility and uncertainty is the S&P 500’s Vix,” he says.
In September, executives will head to Dublin for the third annual European leg of the risk management conferences it has long used to attract new business in the US.
The proprietary 20-year-old contract is central to the CBOE’s growth. Transaction fees from its Vix and S&P 500 index options contract account for more than half annual revenues.
The Vix looks at the cost of buying a range of options on the S&P 500. When the Vix is low, as it is now, 30-day options are cheap, suggesting there is little demand for protection and investors do not fear disruptive events in the coming month.
But this year it jumped to near its historical average, moving up during Russia’s incursion into Crimea and during periods of uncertainty over the Federal Reserve’s monetary policy. That spurred increased Vix trading, helping CBOE to record first-quarter earnings.
The importance of the Vix among hedge funds and other institutional investors has surged in recent years, buoyed by the popularity of exchange-traded products that are based on it.
Average volumes for options on the Vix are more than 700,000 contracts a day so far this year, nearly triple the rate in 2010, while those in futures on the Vix have soared to 186,000 contracts a day, more than 10 times their 2010 level.
The CBOE launched a London hub last February to capture overseas interest and began extending trading hours in late October after months of delays caused by a software glitch.
Trading during non-US hours now accounts for roughly 7.5 per cent of the CBOE’s futures exchange’s total daily volume, a figure that can double if there is an overnight international incident.
Analysts say the international push will position CBOE well if and when the Vix moves back towards its historical average.
Mr Tilly says: “Our primary focus is domestic,” because many of the institutional investors that are the Vix’s target customers still do not trade the product.
“How do I get the big money behind hedging the gap in their portfolio that is represented by volatility?” he says. “That’s what we spend our time on primarily.”
Vix futures have in recent years also become the basis for a number of ETPs that seek to give investors an easier way to hedge or trade volatility.
Ralph Edwards, a veteran options trader, says that, while the Vix is not perfect, “it’s going to work well enough and by focusing on the deepest and most liquid market for volatility, you probably save yourself from volatility products that are me-too that don’t quite get the job done”.
The strength of its proprietary products has driven speculation that the CBOE will be acquired, possibly by its larger neighbour across town, CME Group.
Mr Tilly says the company must “act in the best interest of our stockholders” but that “there is no for-sale sign around our neck”.
“I would love to find a CBOE out there that has proprietary products, margins over 50 per cent, is lean, controls cost, owns its own technology and has products that are protected by either their own IP or exclusive licenses.”
“That would be a terrific target, something we would look at pretty closely.”