A talk with Ed Tilly on taking over as president and COO of CBOE
On November 1st, CBOE Holdings named Ed Tilly to take over the roles of president and chief operating officer, as the previous president and COO, Edward Joyce, left the post for medical reasons. JLN Options’ Sarah Rudolph spoke with Tilly about his new role and what’s going on with CBOE’s volatility products, the SPXpm on C2, and forthcoming endeavors at the exchange.
Q: What will you focus on first in your new role as president and COO?
The title is new but many of these responsibilities are not brand new. I’ve actually been handling some of those responsibilities for some time. It is hard to fill the shoes of Ed Joyce, who has been absolutely terrific here.
A: Right now what’s interesting for me is the focus on the public company aspect of CBOE Holdings and how, by offering competitive new products and state-of-the-art technology to the marketplace, we can drive shareholder value. That will be a big focus of mine going forward.
Q: You were instrumental in starting up C2, which recently started trading the SPXpm contract. How is SPXpm doing, who have the initial traders been, and ultimately, who do you think will trade it the most?
A: We launched SPXpm just over a month ago with very basic functionality. Initially, we were processing very simple orders and there was much market maker-to-market maker transaction. We built up open interest of 50,000 contracts during the most recent expiration week, and average daily volume in October was roughly 5,000 contracts a day. We have since rolled out complex orders — so customers can trade spreads in SPXpm — and paired order functionality, which allows off-exchange pairs of buys and sells and the ability to send paired orders to the exchange. And just recently we increased the guaranteed participation rate on those paired orders to 40%. That’s the maximum allowed by the SEC.
In this time frame we’ve also doubled the number of market makers on C2. So we’ve really seen a big increase in the amount of quoters providing dedicated liquidity. We expect to see the mix of participants change and move from market maker-to-market maker to a more diverse user base as the product becomes more and more mainstream — broker dealers, firms and customers.
Q: What’s happening with all of the volatility indexes on which you began disseminating values earlier this year? And what’s in the pipeline for products on these indexes?
A: In the volatility complex, we’ve started disseminating volatility values on single stocks and on sector-specific ETFs and converting those benchmarks into tradable contracts. The volatility contracts we ultimately introduce will be driven by customer demand. Possibly look for us to begin trading volatility on some of the very active ETFs. We’ll be making some announcements soon on the next tradable volatility products.
Q: You have been very involved with the development of the VIX product line. Are there any licensing deals you are working on?
A: I think it’s important to point out that the licensing deals are with our partner, Standard & Poor’s. We have many exchanges and companies in the U.S. and internationally that come to us looking for licenses. We are always reviewing those, but it is always done through our partnership with S&P.
Barclays was the first of the major institutions to take licenses with S&P in order to do exchange traded notes that replicate exposure to various CBOE VIX contracts. Barclays tried to replicate the return you would get from holding VIX futures with their VXX ETN. Currently, there is roughly $2 billion in total assets under management from a variety of issuers – Barclays and others – pegged to VIX futures and options.
Q: CBOE recently began publishing the CBOE S&P 500 Skew Index. How will investors use this index in their trading strategies?
[“SKEW” measures the perceived risk of a “Black Swan” event– in particular, an extreme, unexpected downward move — in the U.S. equity markets. The Skew Index can be used to measure this risk, also known as “tail risk.”]
A: SKEW is an interesting index. We think it is an opportunity for investors to gauge the perception of the relative value of out-of-the-money puts vs in-the-money and at-the money calls. We think it may cause other trades to occur. For example, if the SKEW is 135, about 20 points higher than the historical average, that means investors are putting more value in out-of-the-money puts than calls. As the Skew goes up, investors may be looking to take action in the broader market, either increasing their leverage or increasing their hedge.
Q: What’s the latest at CBOE Futures Exchange? Will you step out of your index comfort zone with the CFE?
A: What we’ve brought to the market is a futures contract that allows people to trade volatility. Yes, we have announced that we’ll be launching a real estate index, and we look forward to giving people an alternative hedging method for real estate exposure. We could bring out additional products in the volatility space as well – possibly single-name and ETF contracts. We are primarily in our comfort zone, but we are indeed stepping out of it a bit.