Watch Out VIX: Nasdaq Amps Up Volatility Game

ajacobson

ajacobson


January 14, 2019
Watch Out VIX: Nasdaq Amps Up Volatility Game
Nasdaq is working on an alternative to Cboe’s market fear gauge


Chicago-based Cboe has long been the principal player in the volatility trading universe, and it oversees the Cboe Volatility Index, or the VIX. PHOTO: SCOTT OLSON/GETTY IMAGES
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By
Gunjan Banerji
Dec. 22, 2017 5:30 a.m. ET

The VIX is getting a rival.

Nasdaq Inc. is working on launching futures and options linked to an index that uses a different way to track volatility in the S&P 500, the benchmark gauge for the U.S. stock market, said people familiar with the matter. The launch is subject to regulatory approval and would compete against the market’s so-called fear gauge from Cboe Global Markets Inc.


Nasdaq also has discussed internally a similar gauge for the Nasdaq-100—the tech-heavy measure that is owned by the exchange, the people said.

With the plan, New York-based Nasdaq is vying for a slice of the volatility trading business, which has shown little sign of slowing despite historic calm in global markets.

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Chicago-based Cboe has long been the principal player in the volatility trading universe. It oversees the Cboe Volatility Index, or the VIX. This year, the VIX was the target of skepticism amid claims that it was vulnerable to manipulation.

The biggest difference between Nasdaq’s volatility index, called the Nations VolDex, and Cboe’s VIX is that the Nasdaq version is based on options for the largest S&P 500 exchange-traded fund—the SPDR S&P 500 ETF Trust, which is one of the most traded securities in the U.S. stock market.

In contrast, Cboe’s VIX tracks options on the S&P 500 index itself.


Options on the S&P 500 ETF actually have become more popular than the index contracts. S&P 500 ETF contracts were the No. 1 traded U.S.-listed stock option this year through September, according to Tabb Group. Options on the S&P 500 index itself followed, the data show.

Stock BetsVolume of options on the biggest S&P 500 ETF outpace trading of options on theindex itself.Contracts tradedSource: FactSet, Cboe Global Markets
.millionS&P 500 OptionsSPDR S&P 500ETF TrustOptions2008’09’10’11’12’13’14’15’16’170100200300400500600700800
Another difference between the two: Cboe’s VIX includes options that can be exercised if the S&P 500 index spikes dramatically up or down. In contrast, the VolDex is based on options prices that are closer to where the S&P 500 ETF is trading. VolDex’s creator said in a white paper that focusing on the more liquid options is a more accurate measure of volatility.


John Griffin, professor at University of Texas at Austin, co-wrote a paper earlier this year that says the VIX’s design can be manipulated. In general, the types of options used in VolDex “are less susceptible to being pushed,” he said.

In May, in response to the manipulation claims, a Cboe spokeswoman said that trading flagged as irregular in the paper is consistent with legitimate trading. She also said at the time that Cboe maintains a surveillance program for behavior like manipulation.

VolDex futures would expand Nasdaq’s volatility portfolio. The exchange operator gained control of the VolDex when it bought the International Securities Exchange last year.

On Nasdaq’s plans, Cboe’s Bill Speth said, “It’s not unusual to see competition when you have a successful product like the Cboe Volatility Index.”

“We have great confidence that the VIX will remain the premiere volatility benchmark,” said Mr. Speth, who is vice president of research and product development at Cboe. Even competing products can help VIX products because hedgers often use liquid VIX futures and options to offset other positions, he said.

Volatility Bets SurgeOptions traded on the VIX hit fresh records this year even as markets were calm.Contracts tradedSource: Cboe Global Markets
.million2012’13’14’15’16’17’180.00.51.01.52.02.53.03.5
Despite prolonged tranquility in the equity market, volume of VIX options hit several records this year. An exchange-traded product that tracks the VIX was one of the most-traded securities in the entire U.S. stock market during 2017.

It is a lucrative area for Cboe. The exchange operator’s transaction fees generated by futures and index options swelled to 88% in 2016 from about 58% in 2011, according to the company’s financial reports. The gain was largely driven by volumes and fees from VIX options and futures, as well as options on the S&P 500 index.
 
Isn't this old news, like Dec 17 or something? My understanding is that the whole idea kinda died

PS. John Griffin is naive bordering on delusional; he literally thought that he was the first one to know about it and that "a bank asked me for the source data so they can manipulate it better".
 
According to Dow Jones, Nasdaq will begin disseminating its new volatility index - ticker VOLQ - on January 24. It will use options prices to calculate the expected 30-day volatility of the Nasdaq-100.
 
ajacobson said:
According to Dow Jones, Nasdaq will begin disseminating its new volatility index - ticker VOLQ - on January 24. It will use options prices to calculate the expected 30-day volatility of the Nasdaq-100.
More...
Do you have a link to that by chance? It might a handy normalized measure for Naz vol if anything
 
https://www.spglobal.com/marketintelligence/en/news-insights/trending/IomURpD6EZMFEAJJgEwbqA2


Nasdaq Inc. is plotting its entrance into the volatility trading business with a new index set to go live next week.

On Jan. 24, the New York-based exchange operator plans to launch an index that will measure 30-day implied volatility based on options tied to the Nasdaq 100, according to a Jan. 10 trading bulletin. Known as VOLQ, the Nasdaq 100 Volatility Index will provide traders with a new gauge of equity market swings at a time when trading off of such movements gains more steam across Wall Street.

"It just seemed like a natural next step," said Walt Smith, Nasdaq's senior vice president of market services, in an interview. "The Nasdaq 100 is one of our flagship indices."

Nasdaq's VOLQ will be the newest entrant in a trading space long dominated by Cboe Global Markets Inc. and its "fear gauge."

The Chicago-based exchange operator is the architect behind the most well-known volatility gauge on Wall Street, the VIX, which underscores a suite of volatility-based options and futures contracts that analysts say drive much of Cboe's revenues. Keefe Bruyette & Woods analyst Kyle Voigt estimated in a February 2018 research report that about 25% of Cboe's revenues in the second half of 2017 were linked to its VIX products.

Nasdaq's interest in the volatility business has existed for several years. In 2016, the exchange acquired International Securities Exchange, which had been working to launch options tied to another volatility index — the Nations VolDex — prior to the deal.

Since the acquisition, Nasdaq has been working to launch options and futures contracts connected to the VolDex, which uses options on the SPDR S&P 500 exchange-traded fund as a foundation. But those plans have faced an uphill battle because regulators would need to provide an exemption for Nasdaq to launch VolDex-linked contracts ultimately based on a single product. That approval process can often take longer than contracts based on an index.

While plans for VolDex-linked products continue to develop, Nasdaq will build up VOLQ, a process that started in the summer of 2018. The index will use the same intellectual property that underlines the VolDex.

Nasdaq's foray into the volatility market comes at a time when traders look for more ways to profit from broad market gyrations, especially after volatility rushed back into global markets in 2018.

But VOLQ is not meant to compete with the VIX, according to Nasdaq's Smith, who described the index as a "complement" to the VIX and "another way to express volatility." But Nasdaq may be setting itself up to eventually deploy a suite of products not unlike the VIX options and futures contracts that traders piled into in 2018. Cboe's VIX futures hit a record average daily volume of roughly 295,000 in 2018, while average daily volume for VIX options in 2018 totaled about 667,000.

Cboe declined to comment on Nasdaq's VOLQ.

The two companies' volatility-linked derivatives products could open up a new set of trades on Wall Street too, said Russell Rhoads, head of derivatives research at consultancy company TABB Group, in an interview. Some traders currently use VIX-linked products to bet whether the underlying index's gyrations will rise or fall, while others use those products as hedging tools.

"Traders love volatility," said Rhoads, who worked at Cboe for nine years, most recently as director of education at the Cboe Options Institute. "You need the people that are using volatility as a hedging tool to create the liquidity for the people that like to harvest the volatility risk premium. We've got both of those things now."
 
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