CFE Hits its Stride

Terry Flanagan

CBOE Futures Exchange has seen record volumes in 2013, and the Chicago-based trading venue plans to build on that with initiatives including expanded hours and new products.

Nine years since the inception of CFE, April 2013 was a banner month for its flagship VIX futures, with a record 4.06 million contracts exchanged in 22 trading days. CFE reported that year to date, exchange-wide and VIX futures volumes are running well more than double year-ago levels.

Strong volume and current open interest of more than 370,000 in the VIX futures “give market participants the confidence the product is here to stay,” said Jay Caauwe, managing director of business development for CFE.

The healthy notional value of VIX futures — 10 times that of the VIX options market — helps CFE open doors with large institutional traders. The exchange is also pushing for more order flow through initiatives such as expanded hours and the development of a trading hub in London, according to Caauwe.

Even with volatility as measured by VIX near historic lows in 2013, the CFE is encouraged that the utility of the product has been proven beyond strictly a directional gauge.

“We have a product that is embraced globally, built on the index that is recognized as the benchmark for pricing equity implied volatility, endorsed by institutions and proprietary traders with all market participants benefitting from a deep and liquid market,” Caauwe told Markets Media.

The financial turmoil of several years ago boosted interest in CFE products. “The ‘Eureka’ moment of 2008 helped to demonstrate the need for management of the risk associated with volatility,” Caauwe said. “The marketplace saw the impact it had or could have portfolio performance that year, including, for some, helping to ride out the storm or in some cases, improve returns.”

While open interest ebbs and flows, CFE reads current levels as indicative that traders are holding positions and rolling them forward, in anticipation of capturing benefits in high-stress periods.

When volatility does spike again, “there will be more demand for exposure to it through VIX futures,” Caauwe said. The market is “large enough that traders from all market views can access that liquidity and gain the leverage they need.”

Hedge funds have historically been among the most active volatility traders, utilizing VIX to help manage and hedge exposures. More recently, institutional investors have been getting involved, as well Commodity Trading Advisors (CTAs) who deploy VIX futures as an overlay to trend-based strategies.

“We’ve got a healthy breadth of market participants,” Caauwe said. “We’re seeing crossover effects based on the similarities between a fixed-income forward rate structure and the upward term structure of the VIX futures.”

Caauwe said the luxury of having the VIX methodology in-house, especially as market participants grow more educated on volatility trading, is that it can be applied to a host of other asset classes, including commodities.

There are seven CFE contracts that utilize the VIX methodology, plus about 30 different global products including numerous exchange-traded products, funds and notes that reference the VIX index and VIX futures. Caauwe said CFE will continue to create more alternative asset class products inside and outside the volatility complex.

In late 2011, CFE pulled forward the start of the trading day from 8:30 a.m. Chicago time to 7:00 a.m.; about 6% of total VIX trading now occurs in that ninety-minute period, the exchange said. The next phase of expansion, expected by early next year, will be adding 45 minutes on the back end of the trading day and, later, to open at 2:00 a.m. to align with the start of trading in London.

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