Nasdaq Inc. is plotting its entrance into the volatility trading business with a new index set to go live next week.
On Jan. 24, the New York-based exchange operator plans to launch an index that will measure 30-day implied volatility based on options tied to the Nasdaq 100, according to a Jan. 10 trading bulletin. Known as VOLQ, the Nasdaq 100 Volatility Index will provide traders with a new gauge of equity market swings at a time when trading off of such movements gains more steam across Wall Street.
"It just seemed like a natural next step," said Walt Smith, Nasdaq's senior vice president of market services, in an interview. "The Nasdaq 100 is one of our flagship indices."
Nasdaq's VOLQ will be the newest entrant in a trading space long dominated by Cboe Global Markets Inc. and its "fear gauge."
The Chicago-based exchange operator is the architect behind the most well-known volatility gauge on Wall Street, the VIX, which underscores a suite of volatility-based options and futures contracts that analysts say drive much of Cboe's revenues. Keefe Bruyette & Woods analyst Kyle Voigt estimated in a February 2018 research report that about 25% of Cboe's revenues in the second half of 2017 were linked to its VIX products.
Nasdaq's interest in the volatility business has existed for several years. In 2016, the exchange acquired International Securities Exchange, which had been working to launch options tied to another volatility index — the Nations VolDex — prior to the deal.
Since the acquisition, Nasdaq has been working to launch options and futures contracts connected to the VolDex, which uses options on the SPDR S&P 500 exchange-traded fund as a foundation. But those plans have faced an uphill battle because regulators would need to provide an exemption for Nasdaq to launch VolDex-linked contracts ultimately based on a single product. That approval process can often take longer than contracts based on an index.
While plans for VolDex-linked products continue to develop, Nasdaq will build up VOLQ, a process that started in the summer of 2018. The index will use the same intellectual property that underlines the VolDex.
Nasdaq's foray into the volatility market comes at a time when traders look for more ways to profit from broad market gyrations, especially after volatility rushed back into global markets in 2018.
But VOLQ is not meant to compete with the VIX, according to Nasdaq's Smith, who described the index as a "complement" to the VIX and "another way to express volatility." But Nasdaq may be setting itself up to eventually deploy a suite of products not unlike the VIX options and futures contracts that traders piled into in 2018. Cboe's VIX futures hit a record average daily volume of roughly 295,000 in 2018, while average daily volume for VIX options in 2018 totaled about 667,000.
Cboe declined to comment on Nasdaq's VOLQ.
The two companies' volatility-linked derivatives products could open up a new set of trades on Wall Street too, said Russell Rhoads, head of derivatives research at consultancy company TABB Group, in an interview. Some traders currently use VIX-linked products to bet whether the underlying index's gyrations will rise or fall, while others use those products as hedging tools.
"Traders love volatility," said Rhoads, who worked at Cboe for nine years, most recently as director of education at the Cboe Options Institute. "You need the people that are using volatility as a hedging tool to create the liquidity for the people that like to harvest the volatility risk premium. We've got both of those things now."