ANALYSIS: Cboe’s derivatives head Clay reflects on a volatile year

Cboe Global Markets embarked a year ago on an effort to align the US group's global derivatives business under one umbrella ahead of what has been a turbulent twelve months characterised by bouts of volatility.

Speaking to FOW one year after taking the reins of the project, the Chicago-based exchange’s global head of derivatives said the move has already paid dividends, driving a series of new launches tailored to fit the new market environment.

“If I think back to a year ago, we knew that we were going into an exceptional election cycle across the world and therefore a sustained higher volatility regime across the year,” Clay said in an interview. “As we look at what has happened since, it has proved fortuitous that we organised the derivatives group as we did – bringing Cboe Labs, our options educational arm and the global businesses into a single framework. That has been key to how we have been able to bring so many new products to life.”

Cboe Labs, the firm's product development arm, has certainly had a busy period. In January the exchange added Tuesday and Thursday expiries for its main and mini Russell 2000 index options complex. Cboe has also added an iBoxx $ Emerging Market Bond Index (IEMD) future to its credit futures suite, which became available to trade on June 17. In addition, the group last month listed a revamped version of its variance future and will on October 14 launch an options on its volatility index (VIX) futures.

For Clay, these tools supplement the strength of Cboe's core franchise, the S&P 500 Index (SPX) and VIX complex. September showed a 20% year-on-year jump in trading of its main VIX option contract to 18.9 million contracts overall, according to FOW Data, while SPX activity was flat on last year with 60.5 million lots trading in the month. That translates into a healthy 2024 so far, with SPX options 7% higher in the year to October 1 compared to the same period last year, at 3.1 million contracts a day on average. VIX options have risen 15% on the same basis, to 850,000 lots, according to data provided by the exchange.

“With the US election ahead of us, we see SPX skew shifting and really starting to tick up as firms are hedging themselves into the election and for a couple of months afterwards,” Clay said. “Out-of-the-money puts are steepening, and that is very much in line with what we were expecting to see. That has translated into above average volumes across VIX options, VIX futures and SPX options. Products that are proven risk transfer and hedging mechanisms and have worked exactly as they are designed.”

Record trading across the US options market in July was followed by a historic spike in volatility on August 5, with bearish economic reports in Japan triggering an unwind of fund carry positions designed to benefit from rates differentials in the US and Japanese market. At that time Cboe’s zero-day-to-expiry SPX options saw a market share decline to 26% of overall volume (see chart 1), well below its average for the year-to-date of 48%. The change was a temporary blip, according to Clay who reported that October 1 saw 55% of the market executed via the short-term contracts – underlining a consistent trend for Cboe.

“With the severity of the yen carry unwind in early August, we did see a natural short-term pullback in the percentage of 0DTE options against total SPX volume on August 5, but still saw 1.2 million SPX 0DTE contracts traded,” Clay said. “That was a function of the uncertainty but certainly has not been a trend as we have seen usage continue to track historical averages. It demonstrates the range of tools our customers now have available to them.”

Chart 1

Source: Cboe Global Markets

Clay moved to the new role in October, after heading up the Chicago group's data and analytics business which was already organised on a global basis and therefore provided a template for the new division.

“When it comes to thinking about importing flow into the US capital markets, and there has been a tailwind of demand over the last decade, we really view the Asia Pacific markets as an untapped opportunity,” she added. “There are barriers in terms of access and data. Once you start chipping away at those pathway obstacles then you see the connectivity really start to happen, because the demand is there.”

Cboe is taking a structured approach to its expansion plans, with new hires and offices to support its ambitions in the region.

“We are really invested in working on the ground with those regional broker dealers to provide that access,” Clay said. “We have identified six core countries that we want to meaningfully expand in, and we have identified the players, the pathway challenges and the drivers for their business in each of those markets. We are attacking those with tactical objectives and steps so we are really thinking about this intentionally as a long term growth driver.”

Cboe already has offices in Hong Kong, Singapore, Tokyo and Sydney. In the past year, the firm has already onboarded six retail broker dealers, with more in the pipeline in what is a sign of healthy demand for access to US markets.

That is what the firm calls the “import” side of Cboe’s business, and it has also made strides in “exporting” its market framework into other regions. Most notably, it is in the third year of an effort to encourage options trading in Europe through its Cboe Europe Derivatives (CEDX) exchange, which lists pan European index futures, options as well single stock options on index constituents. CEDX in June and July reported a step up in volumes, as Interactive Brokers and IMC rolled connectivity out to clients.

“We are offering the same set up that the US participants really understand in Europe,” Clay said. “That is what you could call the export leg of the business, and that is really starting to resonate. So we are exporting our intellectual property, our technology and our approach across the world.”

The Amsterdam-based exchange traded a record 33,400 lots during the third quarter, up 189% on the same period last year when 11,549 lots traded, according to the exchange.

Looking forward, Cboe is working with retail brokers and vendors to meet the rising demand in its core US products, with many choosing the exchange as their entry point to the index options space.   

“Robinhood for the first time will be offering index options to their clients by the end of this year, and we are participating very meaningfully in that process,” she said. “We are really looking to one of the top retail broker dealers in the US offering index options, and that effort goes alongside vendors like Trading Technologies connecting to Cboe Options Exchange and providing their customers access to the SPX and VIX complex as well. Taken together, that shows the demand for our products, and our position as the natural entry point for firms to offer index options to clients.”