A Market That Acts Like A Tech OEM

Vest’s user-oriented design (Image credit: CBOE)

“Our proprietary options products are established and trusted in our industry. If you think of them as core technologies, we can adapt them for value-added use in a variety of other products,” said John Deters, Chief Strategy Officer & Head of Corporate Initiatives for the Chicago Board Options Exchange (“CBOE”).

CBOE is primarily focused on its exchange business – it offers equity, index and ETP options, including proprietary products such as S&P 500 Index (SPX) options, the most active U.S. index option – but it also has been quietly exploring ways to extend the utility of its products to new customers.

In 1993, CBOE introduced the CBOE Volatility Index (VIX Index), which quantifies expectations of market volatility as evidenced by movements in the price of options on the S&P 500 Index. A futures contract based on the VIX Index came a decade later, in 2004, and VIX options were launched in 2006, revolutionizing volatility trading.

Then, in 2009, Barclays began to offer the first exchange-traded note that tracks VIX futures contracts (VXX), making volatility-based products accessible to a broader group of investors. It paved the way for what are now more than 30 VIX-related ETNs and exchange-traded funds.

“There was a lot of internal debate at CBOE about whether or not we were risking cannibalization,” Deters said. “We ultimately decided it was worth pursuing such new extensions of our proprietary products as a way of innovating while not taking our eye off of our existing business.”

We wanted to find ways for new customers to access our products and their benefits.

A wide range of new VIX-based exchange-trade products followed, from companies such as ProShares and VelocityShares. These products have become important risk management tools for investors, and are among the most heavily traded exchange-traded products on the market.

In 2014, CBOE revealed its engagement with the external fintech ecosystem, announcing it had invested in Tradelegs, makers of a software interface for mapping options strategies and, a year later, that it had acquired Livevol Inc., a provider of tech tools and market data for analyzing and making trades on a proprietary online platform. Both Tradelegs and Livevol allow users to analyze and engage with CBOE’s proprietary products in new and insightful ways.

Then, early this year, CBOE announced that it had purchased a majority stake in Vest Financial, an asset management firm that provides options-based investments through structured protective strategies and technology solutions, and that CBOE would integrate its proprietary products onto Vest’s trading platform.

“We’re finding ways to have new interactions with different customers,” Deters explained. “Vest is one example. The company is making options trading more accessible to a wider range of investors and we wanted to put CBOE’s name and resources behind those efforts.”

CBOE has also been growing its innovation capability organically, developing rules that require potential projects to have financial returns front and center, though without keeping rigidly obligated to them and, on the staffing front, encouraging employees to opt-in, while making sure their involvement is formally recognized.

“The one thing you know about a project at the start is that you’re going to be wrong about the outcome,” Deters said.

“Execution is a condition precedent.”

“You start with a clear mandate to make something happen,” he continued, “but you can’t always use strict financials to benchmark project performance until the project has transitioned to a clearly defined business.”

Vest’s approach to usability also has Deters looking for ways to further the design qualities of the company’s innovation projects.

“They [Vest] spent many hours with customers to reduce complexity, and the brutal honesty of their super-simple platform is one of the secrets of their success,” he said, noting that CBOE is still working on ways to facilitate development processes that combine superior technology with usability.

“Vest delivered a perspective on user-oriented design that we would have struggled to have ourselves,” Deters added.

“There’s no point in making our products available to new customers if they’re not intuitive to use.”

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