May 4, 2018 / 11:43 AM / 6 months ago

Cboe tweaks VIX auction process as profit exceeds estimates

(Reuters) - Cboe Global Markets Inc CBOE.O said on Friday it was making changes to the auction process for its Volatility Index (VIX), known as Wall Street’s fear gauge, which helped drive the exchange operator to record earnings in the latest quarter.

Traders in the S&P 500 options pit at the Chicago Board Options Exchange signal orders shortly after the Federal Reserve's decision to leave short-term interest rates untouched between zero and 0.25 percent in Chicago, April 27, 2011. REUTERS/Frank Polich

Billions of dollars in derivatives products are tied to the Cboe’s VIX, which measures the expected 30-day volatility conveyed by benchmark S&P 500 options prices at a monthly auction. But some in the market say a flaw in the calculation of the VIX allows trading firms to manipulate the index by posting quotes for S&P 500 options without actually trading, leading to imbalances and oversized moves right at settlement.

Cboe has said the suspicions of manipulation are without merit, but acknowledged that more liquidity in the auction would improve the process.

“We have a variety of approaches that we’re using, all with the sole goal of enhancing liquidity in the auction,” Cboe President Chris Concannon said on a conference call with analysts after the company reported first-quarter results.

Cboe was enhancing the technology used for the auction, expanding distribution of messages to market participants about imbalances in the auction, and seeking to increase the number of market makers that provide buy and sell quotes for the auction, he said.

“We have been fielding inbound calls from our market makers and our end users that want to participate in those imbalanced orders because those are moneymaking opportunities for all market participants to offset.”

RECORD QUARTER

A surge in market volatility in February and March, after a prolonged calm in 2017, led to turbulence and high turnover rates in markets worldwide, benefiting exchange operators.

Net income at Cboe rose to $117.3 million, or $1.04 per share, in the quarter ended March 31, from $15.1 million, or 16 cents per share, a year earlier.

Excluding one-time items, Cboe earned $1.38 per share, beating analysts’ average estimate by 10 cents, according to Thomson Reuters I/B/E/S.

Transaction fees at Cboe more than doubled in the period to $547.1 million, mostly due to higher options trading volumes.

Total company options average daily volume (ADV) rose 33 percent to 9.09 million contracts, while ADV for futures rose 44 percent to 368,000 contracts.

Cboe’s net revenue rose by 70 percent to $328.5 million.

Shares of the Chicago-based exchange operator were down 1.8 percent at $103.63.

Reporting by Nikhil Subba in Bengaluru and John McCrank in New York; Editing by Shailesh Kuber and Bernadette Baum

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