CBOE RMC Europe | September 26-28, 2016

The Evolution of Options and Futures Strategies on the Buy-side Trading Desk

Andy Nybo

Partner, Head of Research and Consulting

2

Agenda

�Introduction

�Trends and drivers

�Regulatory influences

�Trends in US derivatives trading

�Final thoughts

�Panel discussion

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Macro trends and drivers

� Global regulatory pressures to reduce systemic risk is shifting demand towards exchange traded products� Capital efficiency (Basel III) will drive future adoption as brokers tier risk

exposures based on client type� Aggressive trading strategies are being forced to use listed products as brokers

restrain credit extension

� Equity-based index derivatives are becoming a bigger part of investment strategies� Institutions are using more index derivatives in strategies as investment

mandates expand� Increased volatility will reinforce demand for risk management activities

� Market participants continue to gravitate to instruments providing efficient exposure and lower costs� Cost to trade is becoming a bigger consideration, especially the cost to enter

and exit position� Liquidity remains paramount, especially when volatility surges and its time to

exit a trade

4

Regulation

4

5

Regulatory focus on bank capital and reducing risk is changing the derivatives trading landscape

� Basel III forcing re-pricing of risk� Banks need to Increase Tier I capital from 2% to 6%;

2.5% surcharge for larger organizations � Some countries are layering on higher capital buffers� Banks are shuttering down risk-taking business

� Volcker Rule on Proprietary Trading� Proprietary trading by banks is gone� Reduced liquidity in most risk markets

� Completely changes the listed derivatives trading landscape� Capital is expensive; relationships determine

availability� Liquidity being provided by prop trading firms� Less bank capital is forcing investors to absorb more

risk

5

6

Reduced capital is forcing banks to cut leverage and take less risk in their customer activities

� Banks have less capital to deploy� To take positions� To take on client risks� To provide capital to investors

� Risk is shifting to liquidity providers, end users and investors� You see this with increased volatility

� Flash crashes (not per se, but increased use of circuit breakers)

� ETF problems in August 2015

� Greater air pockets – bids/offer gaps

7

Risk provision is no longer simply a function of size, instead it is transitioning to a service based on technology capabilities

� With technology comes more efficiency � More efficiency = fewer traders� Fewer eyeballs = fewer traders managing risk� Fewer traders managing risk = smaller risk

� More technology = more speed� Need to pay closer attention to markets

� Instead of dealers putting up size, they amp up speed� Instead of putting up 500 contracts which they

hold for 5 min, they put up 5 contracts which they turn over in 10 seconds

� More easily manage risk exposure, change directions or pull markets

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Structural shifts are driving the use of technology, with speed and efficiency becoming increasingly critical to the industry

Source: TABB Group

Volume by Execution Channel

90%

75%

5%

17%

5%

8%

96%

28%

2%

30%

2%

42%

Marketmakers

Institutions

Automated/algo Point and click Voice

US Listed Options US Futures

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Impact on US derivatives markets

10

-

1

2

3

4

5

6Billons of contracts

US options volume saw strong growth until ‘11; low volatility, less demand and regulatory reform has caused volumes to stagnate

Source: OCC, CBOE, TABB Group estimates

020406080

100 CBOE VIX index

Jan-02 to Sep-16Average VIX: 19.95

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51%

21%

19%

19%

14%

12%

9%

7%

7%

7%

7%

Less liquidity

Fewer counterparties

Dealers not providing capital

More products to trade

Spreads have widened out

More electronics

More VIX Usage

Regulation on bank capital

Violent price swings

Importance of broker

Faster trading

What has changed the most in options trading over the past year?

41%36%

27%

5%

Fewercounterpartieswilling to take

risk

Dealers notproviding

capital

Spreads havewidened out

Regulationimpacting

bank capital

Options traders are seeing the consequences of more regulation: less liquidity and lower market quality

Source: TABB Group

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1.52.0 2.2 2.3 2.4 2.5 2.3 2.3 2.3 2.2 2.1

0.30.6

1.1 1.1 1.21.8

1.4 1.5 1.5 1.5 1.8

184 271 298

246 289

338 322 385 420 416 429

ETF and index volume continue to see momentum, SSO volumes have plateaued as active management strategies migrate to ETFs

ETF

Index

Single stock

CAGR 2006 to 2015: 9.5%Total volume in 2015: 416MMMarket proportion in 2015: 10%

CAGR 2006 to 2015: 18.0%Total volume in 2015: 1.5BMarket proportion in 2015: 37%

CAGR 2006 to 2015: 4.3%Total volume in 2015: 2.2B Market proportion in 2015: 53%

Index optionsMillions of contracts

ETF optionsBillions of contracts

Single stock options Billions of contracts

Source: TABB Group

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Volume of Options with Weekly Expirations

Source: OCC, Hanweck Associates, TABB Group estimates

0%

5%

10%

15%

20%

25%

30%

35%

0

20

40

60

80

100

120

140Weeklies Volume (Left Axis)Weeklies as a % of total volume (Right Axis)

� Weeklies now have 5 expirations (not including regular expiration)

� There are 460 symbols that have weeklies vs. 338 in 2014:Q1

Short term expiries have seen strong growth; trading velocity & structural characteristics require faster analytics & technology

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14

45.5%

44.3%

43.0%

21.6%

20.6%

19.1%

9.2%

9.3%

9.4%

17.3%

18.5%

20.2%

6.3%

7.4%

8.2%

2016:Q1

2015

2014

Top 10 names 11 to 50 51 to 100 101 to 500 501 and above

Top 100 names = 76.3% of total volume

Top 100 names = 71.5% of volume

Source: OCC, TABB Group estimates

Liquidity has become concentrated in the top 100 names as trading velocity accelerates & traders look for liquidity

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What products offer the greatest potential for your activities?(Ranked 1 to 5, 5 Highest)

3.7

3.3

3.3

2.6

2.6

2.6

2.3

2.3

1.9

Weekly options

Extended hours SPX options

VIX products

Extended hours VIX options

Short term VIX products

Flex options

FX options products

IR options products

Daily options

Products offering liquidity, flexibility and improved risk management characteristics are seeing higher demand

Source: TABB Group

16

629851

1,043

1,324

1,653

2,044

2,6452,850

2,328

2,765

3,056

2,690

3,0603,175 3,214

3,614

2001 - 2016PCAGR +12%

Futures volumes are subject to many of the same drivers, with global demand for liquidity contributing to market growth

Source: FIA/TABB Group

Note: All amounts in millions of contracts

2012 - 2016PCAGR +8%

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0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Source: CBOE, TABB Group

June 2011 –June 2016

5-Year CAGR +42%

VIX futures have seen substantial growth, especially after the extreme volatility of 2011

Millions of contracts

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05,000

10,00015,00020,00025,00030,00035,00040,00045,000

Not only are VIX futures volumes increasing but extended hours trading (ETH) is gaining traction as hedging needs evolve

VIX extended hours trading

5%7%9%

11%13%15%17%

VIX ETH as a percentage of total

ETH as a % of all trading

Sep-16:US rate policy shift

Jun-16:Brexit

Note: All amounts represent average daily contract volumes. September averages as of 9/16/16

Source: CBOE, TABB Group

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0

200,000

400,000

600,000

800,000

1,000,000

VIX options

Demand for liquid hedging tools is also driving demand in SPX and VIX options, both in regular and extended hours

0

1,000

2,000

3,000

4,000

5,000

6,000

VIX ETH options

0200,000400,000600,000800,000

1,000,0001,200,0001,400,000

0500

10001500200025003000350040004500

SPX options

SPX ETH options

Note: All amounts represent average daily contract volumes. September averages as of 9/16/16

Source: CBOE, TABB Group

20CBOE HOLDINGS

Question #1 for Andy Nybo Session:• How desirable do you believe it is for customers to have access to VIX FUTURES during

Extended Trading Hours (ETH)?

A) Very Customers highly value the ability to trade VIX futures outside of US market hours.

B) Moderate For certain irregular, highly volatile events, ETH is beneficial.

C) Low Except in extreme circumstances, Customers prefer to wait for the opening of the regular US trading day to trade VIX Futures.

App Polling Questions

21CBOE HOLDINGS

Question #2 for Andy Nybo Session:• How desirable is it for customers to have access to SPX and/or VIX OPTIONS during

Extended Trading Hours (ETH)?

A) Very Customers highly value the ability to trade SPX and VIX options outside of US market hours.

B) Moderate For certain irregular, highly volatile events, ETH is beneficial

C) Low Except in extreme circumstances, Customers prefer to wait for the opening of the regular US trading day to trade SPX or VIX Options.

App Polling Questions

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Final thoughts

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� Global regulation is shifting demand towards exchange traded derivatives� Capital efficiency is forcing firms to evaluate all costs to trade� Brokers are proactively tiering clients to minimize risk

� Market volatility expected to increase as economic growth accelerates and monetary policy shifts� Anticipation around monetary policy changes will sustain volatility� Sustained volatility will entice new market participants into derivatives

� Institutional investor demand for liquidity continues to grow as more funds use derivative strategies� Risk management policies encourage the use of derivatives for hedging� More sophisticated strategies are driving volumes

� Technology is a critical factor supporting growth� Strong technology foundation is crucial to support industry growth� Structural complexity is forcing firms to automate activities

Derivative markets will benefit from more regulation (mostly), rate shifts, volatility, technology, and rising demand from end users

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Panel discussion

� Jared Dubin, Head of Systematic Strategy Research, LMR

Partners

� John Fennell, Executive Vice President, Financial Risk

Management, OCC

� Patrick A. Luongo, Head of AES Options Sales, Credit Suisse

� Alex Orus, Founder and Partner, Principalium Capital AG