With one of its most popular trades in the spotlight, Cboe’s shares take a hit

Finance


With one of its most popular products the focus of this week’s tumultuous stock market sell-offs, Cboe Global Market’s own stock is under pressure.

Shares of the Cboe fell 3.6 percent on Friday and are down 20 percent for the week. The exchange, which last year merged with Bats Global Markets, narrowly missed expectations for fourth-quarter revenue and profit after reporting higher expenses.

Executives, however, have spent much of the week trying to put a positive spin on the market upheaval. The Cboe Volatility index, or VIX, is a widely followed barometer of market sentiment. It had been trading at record lows for much of last year but spiked dramatically higher in the last few days.

That meant a widely mimicked bet on low volatility was forced to unwind, causing pain for products linked to the volatility trade and sparking fears the Cboe’s own trading volumes and related revenue would suffer as a result.

Analysts at KBW estimated that VIX-related products and trading account for as much as 25 percent of Cboe’s revenue. On Friday, Cboe reported fourth-quarter revenue of $265 million, missing the consensus by about $2 million, and adjusted profit of 87 cents a share.

The exchange said it has seen record trading volume in VIX options and futures, each up 23 percent over the last year.

The Cboe also said it had an 82 percent increase in listings of exchange-traded products. Two such products are a focus of this week’s trading. A Credit Suisse product, the VelocityShares Daily Inverse VIX Short-Term ETN, will close after losing nearly all of its assets on Monday.

But Cboe said exchange-traded products betting against the VIX account for 5 percent of average daily volume in VIX futures.

About 21 percent of the investors in short-volatility products are considered non-institutional, meaning not professional traders. The majority are highly sophisticated pros, Cboe said.

But more importantly, as far as Cboe is concerned, investors will continue to want to use volatility-linked products to hedge their stock market exposure. Already investor money is flooding into another short-volatility exchange-traded note now that the Credit Suisse one is winding down, they said. A ProShares fund nicknamed the SVXY has shot up to $700 million from $100 million in assets.

“We see every change in market conditions as an opportunity to redouble our educational efforts,” said Edward Tilly, Cboe’s CEO, on a conference call Friday.



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