Volatility Boosts CBOE

Terry Flanagan

The Chicago Board Options Exchange’s Volatility Index, or VIX, has seen significant attention and activity in recent weeks as the U.S. debt-ceiling debate situation carried on until the eleventh hour earlier this week, and then global economic weakness has re-taken center stage in the minds of investors.

“Given all of the macroeconomic concerns in the market right now, traders can utilize the VIX for many different types of hedges and macro-exposure,” said Jeremy Wien, a volatility trader at Peak6 Capital Management. “Ever since the 2008 crash, when VIX exposure performed very well as a hedge, the volumes have increased fairly steadily.”

The VIX surged by about 25 percent in heavy trading as of late afternoon on Thursday, near a five-month high. The activity and direction could be read as an ominous sign for the market, but there are benefits for market participants who trade volatility, as well as the venue that hosts the trades.

Increased trading of the VIX, also known as the market’s ‘fear gauge,’ was a key factor in boosting CBOE’s profits for the second quarter.

For the quarter, trading in VIX futures increased 190 percent year over year, while VIX options saw an uptick of 34 percent, remarked CBOE chief executive officer William Brodsky during a Thursday conference call. Daily volume in VIX futures surpassed 100,000 contracts for the first time in June. Monthly ADV in VIX futures has been on the rise for three consecutive months from May through July.

CBOE reported net income of $33.4 million in the second quarter, an increase of 34 percent from $24.9 million the same time last year. Revenue also rose, to $120.3 million from $112.6 million.

“This strong performance was posted despite a general slowdown in the economic recovery in April and May that made for sluggish markets and depressed trading levels industry-wide,” Brodsky.

Interestingly, CBOE experienced a decline in options and futures ADV, down 16 percent to 4.5 million from 5.3 million. The company blamed the decline primarily on higher-than-normal trading volume seen from last year’s ‘flash crash.’ Despite this, the company saw ADV increase during the end of the second quarter and into the third, rising 10 percent and 19 percent in June and July, respectively. “Given the recent uptick in trading activity, we are optimistic that we can make up more ground during the remainder of 2011,” said Brodsky.

Options trading volume has remained strong through much of 2011, with industry estimates pegging an increase of as much as 26 percent in July. CBOE asserts that it was responsible for 26.1 percent of all options trading volume in the second quarter, down about 1.1 percent from last year.


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