TT® Connects with Catherine Clay, Global Head of Derivatives, Cboe Global Markets
The continued growth of U.S. options markets has been a major story in listed derivatives over the past five years. Last week at FIA Expo, we announced that the TT platform will offer access to Cboe equity index options in early 2025, providing our global client base with connectivity to a deep and vibrant liquidity pool and the opportunity to trade Cboe’s flagship products – including S&P 500 Index (SPX) options and Cboe Volatility Index (VIX) options, which rank among the world’s most traded and liquid index options contracts. We recently spoke with Catherine Clay, Global Head of Derivatives at Cboe Global Markets, to discuss the U.S. options market and the importance of TT’s new connection to Cboe.
What is Cboe’s relationship with TT?
Cboe joined the acquisition of TT by 7RIDGE as a minority investor in 2021. We see huge value in what TT brings across the global trading landscape as an integral part of the fabric of global capital markets. Historically, TT has been a key player in the futures markets, and we are really excited that it is moving into the index options space.
What does TT’s connection to Cboe Options Exchange mean for Cboe?
I think it is one of the most exciting things TT is doing right now, adding to the many significant achievements of the past few years. Providing access to Cboe’s index options on the TT platform is going to be pretty phenomenal for both Cboe and TT, and importantly, for TT’s client base.
Index options markets in the U.S. have boomed in recent years with the introduction of short-dated options which have sparked huge increases in volumes, both from retail traders and institutional investors, such as hedge funds.
We see increasing participation not only from U.S. market participants, but also those in Europe and APAC, who are increasingly seeking exposure to the U.S. equity markets – and ways to hedge that exposure with U.S. index options.
Today, the index options markets in the U.S. offer a very deep, liquid ecosystem for speculation, hedging, strategy trading and systematic trading.
Index options are popular with investors for several reasons, ranging from the potentially favorable tax treatment to the fact that they are cash settled. Bringing these products to TT’s clientele is going to be transformational.
Options trading in the U.S. boomed during the COVID-19 pandemic. What key trends have you seen since then?
If you look back to the pandemic, people were confined to their homes, receiving stimulus money with lots of time on their hands, and deploying that capital in the financial markets. This led to what is known as “the rise of the retail trader.”
In the wake of this growing adoption of options trading from retail investors, there was a widespread industry effort to educate the market. As a result of that education, retail traders started to trade options much more intelligently.
We have seen that clearly reflected in the data that we analyze as an exchange provider: retail traders have become much, much more sophisticated and are deploying balanced but risk-defined strategies, as well as trading both index options and single stock options.
As a result of this increased sophistication and education, retail traders have had better success in the options market. That positive experience has created a virtuous circle, driving even more adoption of options trading.
It’s not just the retail trader, though, that has increased their exposure to options in the U.S. We have seen a rise in investors that want the optionality that options provide to achieve risk-defined outcomes. In addition, we are increasingly seeing exchange-traded fund (ETF) providers using options within the ETF wrapper.
Overall, we continue to see year-over-year growth in both volumes and customer adoption. So, we are very excited to have TT connecting to this vibrant ecosystem.
How do you maintain innovation in the market?
We are lucky to be fueled by what we believe is long-term, secular growth in options adoption. We’re also riding a trend of increasing capital inflows from around the world into the U.S. capital markets, simply because they are the most deep and liquid markets in the world.
Most of what we do in terms of product development and innovation is built around our core offering: our SPX and VIX product suite. While these products have been highly successful, we believe there is still significant untapped potential for us to reach new markets and a broader customer base globally. How we propel that growth is through continued product innovation to expand the functionality and use cases of those products, while broadening access for a growing global customer base.
Evidencing that, in September we launched Cboe S&P 500 Variance Futures, which will be a very interesting product for the TT userbase.
Variance futures offer the same exposure as variance swaps, but via a listed product. This brings benefits for clients subject to the Uncleared Margin Rules as they can trade in an exchange-listed, centrally cleared product.
We also launched options on VIX futures in October, which, again, I think is a really interesting product for the TT trader who’s already used to trading options that settle into a future. Historically, VIX options settled into cash, but the options on VIX futures physically settle into the front-month future.
Longer term, we are looking at expanding our offerings in the dispersion area. Again, dispersion products are very popular in the OTC markets, so we are looking to bring them into the listed ecosystem.
Do you have any plans to launch total return futures?
Total return futures have been a big success story in Europe, and they are definitely on our radar. But we don’t have any definitive plans currently for a total return future.
In September 2021, you launched Cboe Europe Derivatives (CEDX). What does that bring to Cboe and the European market?
We launched CEDX with the goal of creating a truly pan-European derivatives marketplace to address the inefficiencies created by the region’s fragmented market structure. We saw huge potential for innovation in Europe because when we talked to our clients, they told us the region’s derivatives markets were very difficult to trade because dealing with multiple exchanges and clearinghouses had led to high costs and poor capital efficiencies. The predominance of OTC trading was also deterring new participants.
Many of our U.S. market participants have long wanted to go into Europe and participate more fulsomely in the markets there, but after looking at what it would cost and other challenges of accessing the market, they decided it wasn’t worth engaging.
So, we thought about what we could bring to the European landscape as a differentiated product that could solve those challenges, by leveraging our strong pan-European footprint in cash equities and U.S. options expertise.
We know there’s great appetite in Europe for a similar market structure to that which we have in the U.S. – a market structure that brings very deep, on-screen liquidity and one that firms deploying systematic strategies can rely on.
CEDX is committed to promoting on-screen liquidity and is designed from a pan-European point of view, with a single exchange and clearinghouse, meaning participants don’t have to access multiple exchanges and central counterparties (CCPs) to get pan-European product coverage.
The model dramatically lowers the costs associated with trading European derivatives and utilizes a market structure that is familiar to U.S. clients, while also providing advantages for European clients.
We are very excited by that opportunity and continue to add new participants. TT has been a great supporter of the exchange since launch.