Part One: Cboe's new president Howson talks options, crypto

Part One: Cboe's new president Howson talks options, crypto

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David Howson has just moved to Chicago to become president of Cboe Global Markets, from where he talks to Luke Jeffs in the first part of a two-part series.

David Howson, who was promoted to president of Cboe Global Markets in May, moved in late July to the exchange group’s Chicago headquarters from his former base in London.

His appointment comes at an interesting time for the US options giant as it works on various fronts to diversify further its interests by product (into futures and digital assets) and geography (Europe, Canada, Japan and Australia).

The group’s second quarter performance underlined the extent to which Cboe’s fortunes are partly tied, like those of its US exchange peers, to post-Covid trends such as the rise of retail traders and the collapse of the cryptocurrency market.

Cboe reported on July 29 good and bad news. Its revenue for the three months to the end of June was up 21% to $424.1m (£350m), driven largely by a 32% jump in options earnings to $235.3m.

US options are still Cboe’s engine-room, accounting for over 55% of its group earnings, dwarfing North American equities, its next largest earner, which contributed just over one fifth of revenue ($92.7).

Cboe’s strong options return reflected the fact that it has claimed in the past year a bigger slice of a growing pie. The Chicago group was the largest US options trader with an overall market share of 33.2% at the end of June, compared to 30.4% at the same time last year, Cboe said.

Howson (pictured below) told Global Investor: “If you look at the total US options market, there was an average daily volume (ADV) record in 2021 of about 39.1 million contracts which was up by 10 million contracts vs. the prior year. This year to the end of July, the ADV is higher than last year at 40.9 million, so we had a record last year and it has grown further this year.

“That growth is reflected in Cboe’s options volumes. Last year, we reported an ADV of 11.9 million contracts and this year we have traded an ADV of 13.1 million contracts so that is up again on last year. Then, when we drill down into SPX options, that’s where we start to see the real inflection point where there is a 46% increase in the overall ADV in the first seven months of the year to the end of July compared to the same period last year.”

The new Cboe president said the uptick in US options activity is partly linked to the general heightened levels of volatility kicked off by the pandemic and sustained by the Ukraine war, adding: “A further growth area has been the engagement of the retail brokerage platforms and the usage of those shorter dated options which is consistent with our ambition to broaden access to our products to manage risk across timezones and customer types.”

Howson said the extension in November last year of the trading hours for its flagship S&P 500 and VIX index options has been a success.

“We’ve seen good growth with our global trading hours initiative, with a year-over-year increase of 189% in SPX options volumes during Q2 2022 during global trading hours. VIX options were up 49% and VIX futures up 19% over the same time period during global trading hours.

“Of course, events happen overnight, not just in US trading hours, so the ability to manage risk 24-5 has proven to be extremely valuable.”

The extended trading hours have also fed into the trend of increasing demand for options from retail traders.

Howson said: “When we think about customer types, we have also seen a significant increase in the number of unique accounts traded from retail platforms during our global trading hours. We have leaned into the shorter-dated demand we’ve seen in our SPX weekly complex with the introductions of Tuesday and Thursday expiries.”

Cboe introduced for its S&P 500 weekly options Tuesday expiries in April and Thursday expiries in May, adding to the established Monday, Wednesday and Friday expiries.

Howson continued: “As a result, we’ve seen the ADV in SPX contracts with zero dated expiration increase 120% since the start of 2021, with retail brokerage platforms accounting for 80% of those volumes.

“It is early days, but we think the incremental volume of SPX contracts from the Tuesday and Thursday expiries is about 200,000 contracts per day, which is meaningful.”

And Howson feels the influx of retail traders may have, in turn, attracted more flow from other clients.

“The argument of course is that high volatility days have driven this increase. However, even on days where the S&P 500 has moved less than 1%, we don’t see demand drop-off too much, which suggests more algorithmic type flow or engagement that is less sensitive to volatility.”

Howson said there is more to come for retail traders: “We are continuing to lean into the demand for the shorter-dated exposures, so we are looking at new products as well as serving and educating the retail customers through the retail platforms.”

He cited the recent news that Fidelity has agreed to make available to its clients the small S&P 500 index options (called Nanos) that Cboe launched in March this year.

ErisX write-down

Cboe’s US options story then is a compelling one but the second quarter options performance was overshadowed by the announcement that the group had written down $460m on its May purchase of crypto market ErisX, since renamed Cboe Digital.

Howson said: “The goodwill impairment we recently announced in the Cboe Digital business reflected current market conditions but it doesn’t change the opportunity we see or the execution strategy for ErisX.

“We still think, potentially even more so with the directional signals on regulation and the environment as we see this asset class evolve and mature, that the traditional finance construct of trusted, transparent and regulated markets for digital assets is beneficial for market participants.”

The re-valuation of Cboe Digital has come as Cboe continues its talks with potential equity partners about purchasing a minority stake in the business.

Howson said: “The focus is currently on the equity syndication process for the Cboe Digital business that is in flight right now and the margin futures application to build out the offering. In terms of the equity partners in the Cboe Digital business, it is a broad range of firms that we are engaging with.”

To be continued on Wednesday.

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