FIA EXPO-V: Cboe’s Ed Tilly Talks Retail Investors, European Derivatives Plans

Suzanne Cosgrove

Suzanne Cosgrove


Although it was a period of heightened volatility, 2020 was a big year for retail investors, who jumped in as many institutional investors moved to the sidelines. Finally, over the last week and a half, those institutions are coming back in, said Ed Tilly, chairman, president and CEO of Cboe Global Markets.

In an interview with FIA CEO Walt Lukken on Thursday at FIA Expo-V, Tilly said the industry was caught by surprise by the millions of new retail accounts that were opened during the last nine months through low- or no-cost online platforms.

“They were not afraid to get into a market that was a little more volatile. They liked the move and liked the upward trend,” he said. “We at the exchanges now have to recognize the different needs of today’s retail investor.

“As far as derivatives go, we need to teach investors how to change the outcome — to reduce the risk. … There is tons to do,” Tilly said. “The upside of derivatives is huge.”

He said Cboe is “reinvigorating” the Options Institute, the exchange’s teaching arm, in response to the retail influx. “How to teach someone how to trade the underlying? What is macro-hedging? What is the difference between European- and American-style expiration? That’s our Options Institute, and the OIC,“ he said.

Cboe also plans to expand its global offerings. “We’ll be launching futures trading in June” on Cboe’s Amsterdam-based futures and options market, Cboe Europe Derivatives, Tilly said.

The exchange operator completed its acquisition of pan-European clearinghouse EuroCCP last summer, the first step toward its operation of a futures and options market. It plans to offer trading in equity futures and options based on six Cboe Europe Indices to start, and will use the same Bats technology that powers its U.S. operations, Tilly said.

Tilly appeared dismissive of possible competition to derivatives based on the Cboe Volatility Index (VIX), the dominant market volatility measure, from the Nasdaq-100 Volatility Index futures (VOLQ futures). VOLQ measures the implied volatility of the Nasdaq 100 Index. The VIX Index is based on options on the S&P 500 Index.

He said Cboe continues to look at the new-product pipeline, but is “currently more focused on bite-size exposure,” with mini-SPX and mini-VIX contacts. The mini-SPX options, for example, have European-style exercise, which is designed to appeal to smaller retail investors who don’t necessarily want exposure to a physical contract, he said.

Returning to the topic of March volatility and managing Cboe’s staff during the pandemic, Tilly said it was a “resourceful group,” working from home, temporarily closing the trading floor over a weekend in response to COVID-19, reopening it later, and handling several M&A deals since the outbreak of the virus. ”I’m incredibly grateful,” he said.

Cboe’s eventual return to the office will involve safety first, Tilly said, although “I’ll probably be one of the first ones back.” In the meantime, virtual town halls are held regularly and the take-away is “balance. Turn off your computer some of the time,” he said.

Lukken asked about Cboe’s move to all-electronic systems during the temporary closure of the trading floor versus trading on a hybrid system that includes pit trading. “It was just definitely different,” Tilly responded. “In order to have a hybrid trading platform that operates seamlessly day-to-day, our customers have to access the market the way they want to. There is still great utility to that trading floor,” he said. “There is still an advantage of face-to-face when doing complex orders.”

As for regulators, Tilly noted Cboe and the SEC has been at odds at times over market structure issues, but in March, during the first wave of the pandemic,  “what was encouraging was the way we all (regulators included) looked out for the investing public.” It was an encouraging roadmap for the future, he said.

Tilly was less benign when asked about SEC’s planned examination of fees for exchanges’ proprietary data. Tilly noted that all exchange fees are approved by the SEC before they take effect. ”I guess they can review them.” But he added: ”There is no requirement for any proprietary trading firm to take our proprietary data. Period.”

As for a possible financial transaction tax proposed in New Jersey, an issue also addressed earlier in the FIA conference by Nasdaq’s CEO Adena Friedman and other exchange leaders, Tilly noted “we all have a presence in New Jersey one way or another.” In Cboe’s case, it has a data transmission center located in Secaucus, New Jersey.

Tilly said he recognized that many states are in desperate need of new funding. The pandemic “has been horrible for the states’ budgets. I understand that, “ he said. “We want to be good citizens and help, and partner. But we cannot burden our investors with added costs.”

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