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Cboe shares dive as trading product tied to volatility faces backlash

Cboe Global Markets Inc.'s shares plunged during trading hours Feb. 6 amid mounting concerns over the future of a significant revenue driver for the company.

The exchange operator's Volatility Index, or the VIX, is a widely used measure of trading activity. Cboe's suite of VIX-related options and futures products accounted for about 25% of the company's total revenues in the second half of 2017, according to a Feb. 6 research report from Keefe Bruyette & Woods analyst Kyle Voigt.

The VIX loomed near all-time lows in recent years, with equity markets facing a volatility drought as stocks' rose consistently. As a result, traders and investors began shorting the VIX using niche investment products, betting that volatility would continue to remain absent from the markets.

To do so, traders bought into products like Credit Suisse Group AG's Velocity Shares Daily Inverse VIX Short-Term exchange-traded notes, with the trading symbol XIV, a highly leveraged trading vehicle that allows market participants to bet against a sharp spike in VIX futures. From the end of 2011 to the end of 2017, Credit Suisse's XIV product posted an "eye-popping" return of 1,965%, Voigt wrote in the Feb. 6 report.

But those traders hit a wall Feb. 5 when the S&P 500 posted its largest one-day loss in six years, as volatility surged back into the marketplace. Since Feb. 2, the VIX has jumped about 123.9%, recording a new six-year high Feb. 5. In the aftermath, the value of products betting against volatility plummeted, with Credit Suisse's XIV product's value dropping 94.3% since Feb. 2.

As a result, Credit Suisse decided Feb. 6 to effectively liquidate the product early with an "acceleration date" of Feb. 21.

But by doing so, Cboe may be looking at a diminished return from its suite of VIX-related products.

"That takes away a pretty lucrative pot of trading commissions from Cboe," Tabb Group Founder and Research Chairman Larry Tabb said in an interview. "It's too soon to tell whether other products will make up for it. This has not been good for the Cboe folks."

Cboe's shares closed out the trading day of Feb. 6 down 10.41% to $116.94.