Look out VIX – there’s a new volatility index in town.
Exchange operator Bats Global Markets and financial indexer T3Index have joined forces to bring the capital markets a new measurement of volatility similar to that of the dominant CBOE Volatility Index. The new index, dubbed SPYIX, measures the expected 30-day volatility in the SPDR S&P 500 ETF (SPY), the most actively traded security in the world.
According to industry data, trading in the SPY was about $24bn in daily notional value in the third quarter of 2015, and options associated with the SPY account for nearly half of the $110bn in notional value traded per day across all U.S. equity options.
The SPYIX is calculated using prices from highly active, electronically traded, multiply listed SPY options. According to its developers, this is an improvement over the slower, manually traded, floor-based S&P 500 index options used to calculate other volatility benchmarks – such as the VIX.
VIX is calculated by measuring the annualized implied volatility of a hypothetical option on S&P 500 with 30 days to expiration, based on the prices of near-term S&P 500 options traded on the CBOE floor. Some of these S&P 500 options are still traded by humans, whereas the SPYIX is wholly derived from electronically traded contracts.
Unlike the VIX, which has to be manually adjusted after the weekend and on Fridays to account for slow trading, SPYIX, aside from being calculated from electronic trades in the underlying ETF, also includes important features designed to enhance price stability during periods of low liquidity in the market, such as a proprietary ‘price-dragging’ technique which helps reduce erratic movements in the index.
To be sure, numerous VIX competitors have cropped up over the years, and their success has been limited at best. CBOE has a stranglehold on volatility trading, with a market share of 99.3% this month, according to OCC data.
Bats said SPYIX can also be physically replicated with a strip of options, and has been designed to be easily incorporated into the existing subset of volatility-based products including options, futures and ETPs.
“In the wake of recent events, the SPYIX is Bats’ response to the market’s demand for a more rigorous and dependable volatility gauge. SPYIX is specifically designed to better capture and reflect today’s largely electronic options market,” said Tony Barchetto, head of corporate development for Bats.
Barchetto was referring to the ETF market disruption during the volatility spike of August 24, 2015. And to add to the market’s woes that day, the CBOE stopped publishing the VIX for approximately 30 minutes as the exchange couldn’t calculate a stable value for the index due to the wild price swings in the underlying SPY options used in VIX computations.
Traders can find the SPYIX on the consolidated tape and is accessible also on Bloomberg and Reuters terminals.
Featured image by James Thew/Dollar Photo Club
