VIX Faces Challenge From Trading Robots Unleashed by Bats

Myers: Nothing Better for IPO's Than Downward VIX
  • Exchange introduces index that's similar to CBOE's benchmark
  • Bats argues its automated product is more robust than VIX

The dominant gauge of investor fear -- the VIX -- is about to face new competition.

Bats Global Markets Inc. is introducing its own volatility benchmark for U.S. stocks called the Bats-T3 SPY Volatility Index, an attempt to muscle in on CBOE Holdings Inc.’s VIX territory. Dubbed SPYIX (pronounced "Spikes") by its creators, the index tracks the price of options linked to the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.

Though they’re calculated in different ways, the indexes are similar enough that the price of the SPYIX should closely resemble the VIX, one of the most closely watched benchmarks in finance.

Creating a successful index could open the door for Bats, which is planning an initial public offering, to create its own options products. The fiercely competitive equity-trading business has compelled exchange operators to seek alternative sources of revenue.

The core of the Bats sales pitch is automation. While trading pits where business is done in person are largely extinct, some options used to calculate the VIX are still transacted by human traders at CBOE’s market in Chicago. The SPYIX is derived from options bought and sold electronically. Bats argues that this means its product would have stayed online on Aug. 24, when CBOE’s index was unavailable for 30 minutes because of enormous market volatility.

“The SPYIX is designed to withstand the most turbulent market conditions,” according to Bats, which developed the new benchmark with T3Index.

On Aug. 24, CBOE said trading in the options from which the VIX is derived was temporarily too disjointed to calculate a value.

“Aug. 24 was such a rare occurrence,” Bill Speth, vice president of research and product development at CBOE, said in an interview Monday. “We have no plans to make major changes in the VIX calculation at this time.”

After Bats announced the new index Tuesday, Speth added: “We believe that any trading potential for VIX-like products would rely on traders being able to hedge those products using our highly liquid market for VIX futures and options. We would expect to benefit from the hedging flow that would potentially result from VIX-like products, reinforcing our confidence that VIX will remain the premiere volatility benchmark.”

Fear Gauge

The Chicago Board Options Exchange Volatility Index, also called the “fear gauge,” is widely used to judge anxiety among investors. The VIX measures expectations for price volatility in the Standard & Poor’s 500 Index during the next 30 days.

Investors can trade options and futures linked to the VIX to hedge their portfolios -- one of the best parts of CBOE’s business. Though the exchange operator doesn’t say exactly how much of its revenue comes from the VIX, 83 percent of its transaction fees last year were from its futures-and-index business, and the VIX plays a huge role at that division.

Bats, which also operates four U.S. stock exchanges, lags behind CBOE in the U.S. options market. In February, it handled just over 10 percent of trading, putting it in fifth place. CBOE, with 27 percent, had the leading market share. To invigorate the business, Bats doubled financial incentives to traders last year and started a second options exchange.

The SPYIX isn’t the first attempt to challenge the VIX. Deutsche Boerse AG’s International Securities Exchange announced plans to list options on the Nations VolDex Index -- which also mimics the VIX -- in January 2014. So far, there are no options or futures products linked to the ISE index.

“We are in discussions with our member firms and evaluating the best way to launch a successful product, such as creating an ecosystem of complementary products based on the index,” Molly McGregor, an ISE spokeswoman, said in an e-mail last week.