Cboe’s Chicago profits from a year of stock market volatility

The folks at the Cboe Global Markets options pits in downtown Chicago aren’t used to seeing new faces. Open transactions have been declining for decades as trades are executed electronically. Many of the approximately 300 remaining people have been there for more than 20 years.

Earlier this year, RFA Securities and Maven became the first new company in 15 years to begin trading stock options contracts on the S&P 500 stock index in person. Established groups such as Optiver have also expanded the number of employees working at Cboe to help meet the growing demand.

Expansion is a sign of the times at Cboe’s. As the only exchange where investors can trade derivatives linked to the S&P 500 and the Vix Volatility Index, it has been one of the biggest beneficiaries of market fluctuations last year and a broader shift towards options trading since the start of the coronavirus pandemic.

It helped the wave of growth in its flagship products Cboe’s Stocks are avoiding the worst of the recent market downturn, with CEO Ed Tiley telling investors that the business has “never been on a stronger footing.”

Line chart of stock or index performance in 2022 (%) showing Cboe weathered the worst of a stock market downturn

The popularity of stock options has skyrocketed. An average of 41 million contracts were traded per day in 2022, according to trading group Sifma, compared to less than 20 million per day in most of the years before. pandemic. Much of that growth has centered on S&P 500 options, which can only be traded on Cboe thanks to a licensing deal with the S&P Dow Jones Indexes.

Many observers believe the initial jump in 2020 was motivated retailers Armed with stimulus checks and the time they have, they will back off as economies reopen. However, the growth continued with the help of Cboe extending it to contracts that expire every day of the week.

Tilly told the Financial Times he is confident the behavioral shift toward options will be permanent even if markets calm down, arguing that “the benefit and flexibility that comes from daily exposure is [not] I will go away “.

However, building on the volumes of the last few years is only going to get more difficult. One strategy has been to add more expiration periods to the S&P 500 mini contracts in an effort to reach out to smaller retail traders.

Some brokers have pushed to do the same with options in exchange-traded funds and individual stocks, but Tilley said the different way these contracts are settled would make this more complicated and risky.

An executive at a trading firm that works with Cboe and several other exchanges warned that while S&P Options has been very successful, Cboe is a one-trick game. . . They let themselves slip in relation to others” elsewhere.

As the exchange approaches its 50th anniversary in 2023, and rapid growth slows in its core business, it is pushing into new countries and product areas to prove to investors that it is more than just a US equity options company.

Cboe expanded into cash stocks, ETFs and foreign exchange when it was Buyer Bats Global Markets in 2017, and has acquired 10 more companies since then. However, it still tracks Nasdaq and ICE in US stock trading volumes.

“So far, so good, but it’s the long-term growth that we need to see evidence of,” said Christopher Allen, an analyst at Citigroup. “They have pulled together a bunch of different platforms. Now they need to turn it into a cohesive network and implement it.”

The explosion in the market for Vix-related products in 2018 highlights the dangers of over-reliance on one area. The sudden drop in share prices caused a rally in the Vix, which in turn led to the closure of two large funds that were betting on the market’s calmness.

The turmoil raised fears that investors would put off using Vix contracts, which until then had been Cboe’s fastest-growing product area. Its stock has fallen 20 percent in a week and has yet to fully recover.

The Vix market suffered an outage of a different kind last week, when an explosive pipe above Chicago’s trading hole forced Cboe’s to shut down roaring market trading for a day.

Tilly says the recent strength in index options has “overshadowed” some of the steps it has already taken to diversify. The $3.4 billion purchase of Bats also provided a foothold in European equity trading, which Cboe has expanded through a combination of small acquisitions and product launches to become the largest stock trading venue on the continent.

It now hopes to follow the same blueprint to grow its newly acquired exchanges in Japan, Australia and Canada. Besides the potential revenue from handling trades in each new market, Cboe is betting that the combination of data from several local exchanges will be more valuable than the sum of their parts.

“When I think about the long-term opportunity for Cboe, it is first and foremost about data,” said Citigroup’s Allen. Large global investors want to consume data from a global perspective, and they prefer to do so from as few providers as possible. . . due to uniqueness [Cboe’s] A platform in terms of a regional perspective, it creates a unique opportunity.”

Not all expansion efforts have been successful. Cboe is making a second attempt to break into digital assets just as the cryptocurrency markets have been affected by the price crash and the FTX scandal.

It announced the purchase of cryptocurrency exchange ErisX when bitcoin was around $65,000 in October 2021. The digital currency has fallen nearly 75 percent since then, and Cboe wrote off $460 million of ErisX’s value less than three months after closing the acquisition.

A collapse of FTX, Tilly said, would strengthen the hand of crypto companies like Cboe that are regulated and backed by trusted companies.

But while their share of the digital asset market may increase, the overall market size has shrunk significantly since prices peaked in 2021.

Allen, who has a neutral recommendation for Cboe stock, compared the cryptocurrency game to one of the cashless calls popular with options exchange traders — a low-probability bet with a potentially large payout.

In contrast, he said, the reasoning behind the international data push was less controversial.

Tilly said the “partial” process of building its global network has sometimes made it difficult to convince investors of the company’s strategy, but he argued that the recent outperformance of Cboe stock showed that the message was waning. There’s an acknowledgment that this Cboe is different.”

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