Cboe outlook just fine despite VIX-related angst, analysts say

CBOE trading floor(Minghe Hu/Medill)

By Minghe Hu
Medill Reports

As inverse-VIX trading dried up during the stock market’s 10-percent correction in February, shares of VIX originator Cboe Global Markets Inc. plummeted a startling 18 percent. But, buoyed by reassuring words from Cboe’s chief executive officer, the high-flying stock partially recovered and the exchange’s outlook remains solid for 2018 in the eyes of analysts.

CEO Richard Tilly, in a conference call as the market bottomed out, pointed out that Cboe’s revenues from inverse-VIX products account for only 5 percent of total VIX futures revenues. The VIX, or volatility index, rose sharply and volume boomed as the market peaked and plummeted, but trading in the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEARCA: XIV) and ProShares Short VIX Short-Term Futures ETF(NYSEARCA: SVXY) collapsed.

Chief Strategy Office John Deters added that “people did not flee the short-VIX strategy.”

He went on: “Buy side users are coming into the VIX market that generates activity from the market-maker community in a ratio of about 3:1. So every new contract that comes in from a customer, spins up three new contracts from market-makers approximately. And that’s the kind of benefit of having more participants doing more business in the VIX futures markets.”

Richard Repetto, an analyst at Sandler O’Neil & Partners LP said in an interview via phone this week, “I think they will continue to grow and powered by proprietary products, and the technology platform migrations [from Cboe’s 2017 acquisition of the BATS stock exchange] will help them as well. Their stock grew dramatically last 15 days,” suggesting that the further appreciation in the near future is unlikely. The price/earnings ratio of Cboe stock is still a lofty 44.93, far above the S&P 500 trailing P/E ratio of 25.68.

According to Bloomberg, the analysts’ consensus rating for Cboe stock is 3.46 on a scale of 1 to 5. Four of the 13 analysts recommended buying the security, and eight say hold, while only one recommends selling. The 12-month consensus target price is $121.18, compared with $112.62 at Thursday’s close. The estimated earnings per share for 2018 is $4.55 compared with $3.42 last year. Estimated revenue is $1.18 billion, up 18 percent from $995.6 million.

Investors were concerned in February about the negative impact of Volatility Index related products as their volume fluctuated through the month. The total volume of the Cboe Futures Exchange dropped 90 percent to 65,450 on March 6 from 675,499 a month earlier. Total open interest declined 64 percent to 77,243 on March 16 from 214,781 a month before.

The total volume and open interest of CFE are declining dramatically since February.(Minghe Hu/Medill)
The total volume and open interest of CFE have declined dramatically since February.(Minghe Hu/Medill)

“Although the VIX futures declined into month-end while open interest fell to multi-year lows,” UBS analysts Alex Kramm and John Good wrote in a note, “it was still enough to drive record ADV,” or average daily volume.

Futures average daily volume at Cboe Futures Exchange on February hit a record of 483,000 contracts, up 38 percent from January, and 84 percent compared with a year ago. According to the company, the unique user accounts of Cboe Futures Exchange increased 27 percent in the fourth quarter of 2017 from two years ago.

The price of XIV plunged in February.(Minghe Hu/Medill)
The price of the VelocityShares Daily Inverse VIX Short-Term ETN collapsed in February. (Minghe Hu/Medill)

The UBS report said the price of Cboe shares is not expected to be correlated to the contraction of Cboe’s Volatility Index franchise, and there’s potential volume expansion of VIX-related products.

However, the revenue of the company will be mainly driven by higher transaction revenues generated by increasing volume of Volatility Index related products, according to a note by Richard Repetto and Collin Cook of Sandler O’Neil.

“The biggest challenge for Cboe revenue will be the volatility complex,” said Repetto by phone. “How will it rebound after a decline in open interest?”

According to the Cboe, the migration of futures trading to Bats Global Markets will enhance the trading system’s performance and attract more users to new technology and products.

The UBS report agreed that the BATS acquisition should help with developing proprietary products and expanding customer base globally.

“Cboe has structural catalysts ahead as legacy Cboe platforms migrate to BATS technology,” Chris Allen, an analyst at Global Exchange & Capital Markets, wrote in a note, “we see as a positive catalyst from both a technology and market structure (order types and handling) standpoint. This should have a beneficial impact on both trading activity and non-trading revenues as new users come onto the platform and existing users increase activity.”

Photo at top: Trading floor of Cboe in Chicago. (Minghe Hu/MEDILL)