You Can’t Rain On Our Parade: Cboe’s Big 2017 Includes Bitcoin Futures. Can It Overcome Regulatory, Margin and Volatility Headwinds?

Jim Kharouf

Jim Kharouf


To hear Cboe Global Markets Chairman and CEO Ed Tilly tell it, his exchange group is firing on all cylinders and adding new ones to the engine. The exchange boasts the top US equity options market and has a lock on volatility products with the VIX futures and options and related exchange traded products. Cboe now has the top pan-European equity market and the second ranked US stock market, as well as a burgeoning FX business. As the migration of its exchanges onto the Bats trading platform continues, with Cboe Futures Exchange due up next month, its technology is taking a major step forward.  

Oh yeah, and it launched the first Bitcoin futures contract in December, a move that shook the trading world. The industry was rocked further by the CME Group’s own Bitcoin contract launch a week later.

Cboe is no stranger to blazing new trails. One could argue it is the last exchange to develop a winning contract that was actually new with the CBOE Volatility Index futures. And volumes there are not too shabby, with average daily volume on the futures of 293,000 contracts and 722,000 on the options in 2017, each up 23 percent in a very low volatility year.  

Its foray into the FX space appears to be making some progress, with average daily volumes of $29.6 billion and 13.4 percent market share of the FX market. Indeed, through innovation and acquisition, it has grown beyond its options roots.

So at its annual January press meeting in Chicago yesterday, the questions were pointed at its latest move in the cryptocurrency space. The first question was not about Bitcoin, but eight out of the first 10 probably were. And this is where we see two things. One is how an exchange like Cboe is well-suited to introduce a product like Bitcoin futures. Its foresight and patience on VIX is a great example of an exchange willing to put in the time, marketing and education to make a product work. And two, it shows how difficult it is to tread into new asset classes.

To date, Cboe says almost 30 trading firms now participate in XBT trading, up from 20 firms on December 11, 2017.  John Deters, chief strategy officer and head of multi-asset solutions for CBOE Holdings, said he is encouraged by the early performance of the contract, but it will take several more settlement days like today’s before they will consider adding an options contract.

Tilly took exception to some critics in the industry who said Cboe’s contract was somehow “rushed” into the market, perhaps without enough thought or vetting. In fact, the contract was first announced back in August of 2017 in response to industry demand for such a contract, he said. Regulators had ample time to question and challenge problematic aspects of the contract’s design and OCC helped set the margin levels through various tests. Deters said various problems have been addressed and planned for, including the question, “What happens if the underlying marketplace for the contract, Gemini, goes down?” In such a case, Cboe can use price data points from Gemini’s auctions, which it holds three times per day for Bitcoin. It can also pull data from other Bitcoin markets to help Cboe determine what the closest price is.

Also, he said, the exchange had an open dialogue with the CFTC on the matter in the weeks leading up to the launch and kept it apprised of the contract details.

But there are some further challenges ahead for this contract as various governments ban trading on Bitcoin and Bitcoin futures contracts. In South Korea, for example, regulators suggested a possible ban on cryptocurrency exchanges and China has cracked down on them as well. Given Bitcoin futures are a 24-hour market for Cboe, there is potential that its Asia volumes could suffer if more countries follow suit. The South Korean government already received more than 200,000 signatures by Tuesday morning, opposing the possible regulatory moves. Tilly said cryptocurrencies pose an interesting challenge for regulators.

“I don’t think we’ve ever seen an asset class so internationally traded,” Tilly said. “It almost requires regulators to come up with some kind of consensus.”

He may be right about that, although the Dodd-Frank, MiFID II and global regulatory harmonization hasn’t been enjoyable enough for the industry to ask for more collaboration.

All of this came on a day when Bitcoin prices slumped to just over $10,000 and Cboe posted a record volume of 13,918 contracts yesterday. CME’s Bitcoin contract traded 3,089 contracts on Tuesday.

Questions about the overall cost of trading Bitcoin were met with relative calm by Cboe executives. Deters said Cboe’s XBT was much cheaper than the 1.5 percent cost per notional value of the spot contract. Not only that, it is providing a two-way market for the first time, and perhaps is bringing the Bitcoin prices more in-line. That may be true, but there is the issue of capital efficiency. And when one factors in the margins and account size a trader must have to access the product, the total cost and capital allocation is quite high.

If Cboe is able to grow this market, it will be yet another way in which it has shown the industry that yes, you can introduce new contracts on new asset classes and succeed.


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