Fear Whips Up Growth In Futures Trade At CBOE

Main Street investors' growing appetite for trading stock-market turbulence is fueling growth for a lesser-known offshoot of the Chicago Board Options Exchange, home of Wall Street's favored "fear gauge."

August's breathtaking swings in U.S. securities values have driven a fourfold increase this year in the trade of futures contracts linked to the CBOE Volatility Index, or VIX, and listed on the CBOE Futures Exchange.

CBOE Holdings Inc. (CBOE), the parent that floated a year ago, includes not only the largest U.S. options exchange by volume but also the futures arm and a small stock exchange.

A surge in VIX-related activity is breathing new life into CBOE's seven-year-old futures market, where volume trails far behind its Chicago neighbors at CME Group Inc. (CME) and last year on its own ranked 45th globally, according to derivatives market figures from the Futures Industry Association.

"The vision is to grow CFE as a standalone futures exchange," said Ed Tilly, CBOE's executive vice chairman.

Behind much of the activity stand a new breed of exchange-traded products that give retail investors and financial institutions a tool to hedge market volatility in a fashion similar to Wall Street banks and sophisticated hedge funds. Investors have poured billions of dollars into such vehicles since the first were launched by Barclays Bank PLC in 2009, and more are in the pipeline.

"Volatility is becoming more and more of an everyday product," said Andrew Lowenthal, managing director of the CBOE Futures Exchange.

Thanks to the VIX franchise, CBOE's futures market has a ready-made niche in volatility products. Futures on the "fear gauge" account for nearly all trade on the platform, where a record 1.75 million contracts have changed hands in August.

That's far fewer than the 135 million options bought and sold at the CBOE this month, but nurturing futures is important to the firm because they carry a higher tariff. The average $1.48 fee for trading CBOE's futures in the second quarter was more than double the 63 cents CBOE earned on its flagship options linked to the S&P 500 stock index, the company reported earlier this month.

On a conference call this month, CBOE Chief Executive William Brodsky said that while the CFE represented about 1% of group trading volume in the second quarter, it contributed 5% of all transaction fees.

CBOE introduced futures in 2004 to provide a pricing baseline for the launch two years later of VIX options, which quickly became one of CBOE's fastest-growing instruments. The futures remained relatively sleepy until the 2009 entrance of volatility-oriented exchange-traded notes, or ETNs, a form of debt security issued by banks.

The last two years have seen the launch of about 24 such products pegged to the VIX, gathering about $2.2 billion in assets from institutions and individuals looking to protect against, or speculate on, swift turns in the S&P 500. The growth has translated to fees for CBOE, as daily exposure management requires trading the futures.

"The prices of our ETNs are based on VIX futures and we and other market participants often hedge positions in the ETNs with VIX futures, so the trading volumes tend to grow together," said Tim Edwards, vice president of product development for Barclays Capital.

In tumultuous trading, activity in the products can spike. Amid heavy selling of U.S. stocks on Aug. 8, Barclays' main VIX exchange-traded note became one of the five most-traded securities on the New York Stock Exchange, Edwards said.

CBOE aims to build up the CFE as its decades-long position as the biggest U.S. operator of stock-options markets has at times been usurped in recent years by rivals like NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ).

A new slate of contracts linked to real-estate prices is planned, covering 25 metropolitan areas, and CBOE officials are looking at other potential markets that have not yet been fully explored by other exchanges.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

--Christopher Dieterich contributed to this article.

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