Wall Street Sours on Cboe Following Collapse of VIX-Linked Funds

• February 07 2018
• Nick Baker, Annie Massa

The pain continues for Cboe Global Markets Inc.

The pain continues for Cboe Global Markets Inc.

The exchange fell as much as 5.1 percent Wednesday, building on Tuesday’s record 10 percent plunge, after analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. downgraded the stock to “neutral,” leaving just two buy recommendations on Wall Street.

It’s an abrupt shift for Cboe, which rallied 69 percent last year, more than any other financial stock in the S&P 500 Index. The Chicago-based exchange gave Wall Street something, an index called the VIX, that became the basis for a popular strategy: shorting volatility.

But that trade blew up this week. Funds linked to the VIX lost billions of dollars when the index surged. Credit Suisse Group AG decided to liquidate one: the VelocityShares Daily Inverse VIX Short-Term ETN, which used Cboe’s VIX futures contracts to make its wagers. This is “potentially the tip of the iceberg with a likely reduction in VIX futures trading activity looking out 1-2 months,” JPMorgan analyst Kenneth Worthington wrote in a report.

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A spokeswoman for Cboe declined to comment. The company, which owns the VIX intellectual property and licenses it to companies that create funds linked to it, reports quarterly results on Friday.

About 16 percent of VIX futures volumes in 2017 are traceable to the fund that Credit Suisse is closing and another one, the ProShares Short VIX Short-Term Futures ETF, according to a note from Barclays Plc analyst Jeremy Campbell. The ProShares fund has lost almost 90 percent of its value this week.

Increased regulatory scrutiny of VIX products could develop, which “has the potential to negatively impact the growth profile of the overall asset class,” Jefferies analyst Daniel Fannon wrote in a report.

Read More: Amateur Investors Get Burned on Wall Street’s Hottest VIX Trades

— With assistance by Arie Shapira