Part Three: Cboe's blueprint for turbo charging product design

Rob Hocking, Cboe Global Markets’ global head of product innovation and the person heading its Cboe Labs innovation hub, has said the growth in use of zero-day-to-expiry (0DTE) options has driven a shift in the way the market trades volatility, and is a good example of the collaboration with the market that drives product design.

That collaborative approach is core to what Cboe is doing with its innovation hub. The history of such teams goes back to the fabled “skunk works” division at Lockheed Martin. There have been many research and development focussed divisions at investment banks and technology firms. Creating a space dedicated to innovation is nothing new, but what differentiates this latest iteration by Cboe is that it aims to give users a voice at the start of the design process.

“We have a rich history of innovation as an exchange, but what remains a challenge in the innovation process is knowing where to start,” Hocking said. “With the introduction of Cboe Labs, we have a dedicated team centered on the creation, development, and implementation of new ideas. It’s a touchpoint for the industry to come when firms are looking to create something new. We strive to take a customer-driven approach when looking at these new ideas. Nobody knows how to evolve a product, or the need for a product, better than those using them to manage risk. The differentiator for Cboe is that as the exchange platform, we’re uniquely positioned as a neutral partner. We operate a global platform in 26 markets around the world and have industry-leading expertise in developing and supporting tradable products.

“Many innovation hubs are also very internally focused, so you don’t get access to them as an outsider. That’s where we want to go 180 degrees in the opposite direction. We want to work with the market. We want to be the first call for everyone when they have ideas to improve that risk transfer process, that customer experience and we are fully committed to supporting our clients. In that sense, what we have created is a resource for the industry.”

First on the horizon are dispersion strategies, a version of volatility trading that involves taking a position on an index through the option, and taking a series of opposite direction on the components. For example, you could sell volatility on an index and use at-the money-straddles to buy volatility in the individual names. This makes for a cumbersome trading flow which in turn can create barriers to entry.

“We hope that the new Cboe S&P 500 Dispersion Index – and subsequent futures that we plan to launch on it – will do the same thing for one-month implied dispersion as we’ve done with the VIX Index and futures and options for trading volatility: take a very complex strategy and simplify it into an index that can be used as a benchmark, and then eventually tradeable as a simple contract,” he said. “It fits our playbook of innovating with the end goal of breaking down access barriers, and making complex strategies more accessible, efficient and easier to trade for all investors.”

In June, the Commodity Futures Trading Commission approved Cboe Clear Digital to offer margined crypto futures in a significant step for the firm. This capped the US exchange’s re-entry into the crypto market after forming Cboe Digital in May last year based on Cboe’s acquisition of US crypto market ErisX. That is one area where further collaborations could reap benefits for the firm.

“We are excited about some of the various initiatives that we’re working on at Cboe Labs. We hope to bring something to market in the not-too-distant future, hopefully before year-end. Again, that will very much be driven by customer feedback,” Hocking said. “We certainly have some ideas that we’re back testing – and going through all of the data collection around that.”