How do you create a new futures contract? You need an exchange. And you need something that changes in price, like a commodity market – or a financial index. This week we’re diving deep into crafting an index with T3 Index’s founder and CEO, Simon Ho. Simon is no stranger to the vol space, and he has worked in the options industry for over 20 years in trading, product innovation, and risk management roles.
In this episode, Simon and Jeff touch base on the various unique index products at T3, like YLD Vol, ETH Vol, and the VIX competitor SPIKES. They talk through just how SPIKES differs from the VIX, the unusual behavior currently playing out in stock index volatility, the futures, options and ETFs based on SPIKES, and so much more. Plus, Simon gives his hottest takes. Will you be tuning in? SEND IT!
From the episode:
Follow Simon Ho on Twitter: @t3index
From Intro: The Definitive List of The Best Investing Movies
Check out the complete Transcript from this week’s podcast below:
Is there room for a VIX competitor, SPIKES founder Simon Ho sure thinks so.
Jeff Malec 00:07
Welcome to the Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy day after James Bond day everyone, there were six bond actors I don’t count the 67 Casino Royale movie in Her Majesty’s Secret Service over 60 years and all of them were in the duty of the same majesty. Think about that. It’s also one of my favorite Bond movies On Her Majesty’s Secret Service long with You Only Live Twice by Love Me Goldeneye and Skyfall. Picking one from each actor. Anyway, so isn’t a movie but it’s a hedge fund bomb. And we’ve got Michael Harris from one of the best this year quest partners coming on next week. With Caitlyn cook and macro alpha also getting scheduled so go subscribe to be the first to hear from those when they drop. On this episode where we’ve got Simon ho the founder and CEO at T3 Index which designs unique index products like yield vol eth vol and the equity index vol tracking index spikes. We get into how spikes differs from the VIX. The futures options and ETFs based on spikes and how hard it is to compete with a new futures contract where liquidity and scale trumped cost and structure until enough liquidity and scale moves over. It’s chicken or the egg problem. Send it! This episode is brought to you by RCMs. No, I’m going back into movie mode. This episode is brought to you by RCM as the definitive list of the best investing movies, a blog post we did back in 2019. Go Google that definitive list best investing movies and let us know if you agree or don’t want the list. And now back to the show.
All right, Simon, how are you?
Simon Ho 01:37
I’m very good. Thank you. Thank you for having me.
Jeff Malec 01:38
No worries. And where are you? Lovely Australia?
Simon Ho 01:42
Yes, I’m based in Sydney, Australia.
Jeff Malec 01:45
So, yeah. You didn’t give me the background? I want to see the ocean or some.
Simon Ho 01:51
I thought that may be corny.
Jeff Malec 01:54
It would but were in Sydney. Right? right downtown. What I only know like Manly Beach and downtown.
Simon Ho 02:01
Oh, that’s funny. So I live at Manly. Yeah, it’s a nice little sports only about 20 paces from the beach. And it’s probably one of Australia’s best beaches, I think.
Jeff Malec 02:12
Yeah, I’d agree with that. I gotta get back. I was out there did Surfers Paradise. Fremantle in Sydney. So I need to do Melbourne still. And some of the some of the rest of us in New Zealand never done New Zealand. So
Simon Ho 02:26
New Zealand’s awesome.
Jeff Malec 02:29
I suspect. So have you on I’m gonna talk about spikes. But give us a little background. We were talking offline. You’ve been doing all sorts of vol since the mid 90s. So kind of where’d you get your start in the vol space? And how’s how’s that evolved over the years?
Simon Ho 02:46
Yeah, sure. So I fell in love when I first saw people doing FX options trading because I thought wow, you can actually trade volatility. This isn’t a new dimension that I didn’t even think about, you know, and so that really pushed me to sort of delve into it a little bit more directly, and so on.
Jeff Malec 03:06
Whereas you were a trader, somewhere where Where did you see that?
Simon Ho 03:09
Yeah, actually, that’s a good point. Um, so I do, it was doing an intern with a bank in Sydney, and it was the JP Morgan. And that’s where I got exposure to the concept of trading volatility as an asset class. And I thought it was freakishly interesting. And frankly, I still feel that way. Today, to be honest with you, I think it’s probably the only thing that I really ever want to do is to be involved in this kind of stuff.
Jeff Malec 03:36
And so they were traders at the bank trading on the bank desk, doing vol hedging, or outright trying to make money for the prop desk or whatnot.
Simon Ho 03:46
Okay, so initially, I came on as a trainee wanted to work on the FX options desk, but Sydney, the Sydney office didn’t have the ability for me to feel such a role. So they moved me to Singapore, which was the hub at that time for JPMorgan in Asia. And so that’s where I cut my teeth, so to speak, when it comes to volatility. So ultimately, I ended up running that business for some time, moved to Merrill Lynch in New York, because I am also enamored with New York, and I loved it. And so I thought, Oh, I’ll give you an opportunity to go there. Why not? So did that also then moved to London, for a little while to work for Goldman Sachs, where I was in charge of the FX options for a while. And then from there, we sort of stepped out. So now we’re sort of getting into the 2000s. And I was no longer we’ve done a lot of what I wanted to do in the FX options, trading space. And so we then changed tact somewhat. And we started to think about so I’ve got I’ve got a very good team who are there are some people here who are just ridiculously intelligent. And so we wanted to put our minds towards creating new, better instruments for the market to use and so For example, that’s that was the genesis for the creation of spikes. So I had been trading prior to spikes as a rival. I’ve been a longtime trader of VIX, VIX products, and I thought it was the bee’s knees, I thought was fantastic. You know, this is the best thing you could possibly do. Over time, we decided that why don’t we do a version of our own because there are, from our point of view, at least, there are some shortcomings that could be addressed. And we we kind of felt that it was a bit like the Pepsi to the Coke, you know, why couldn’t you have something that was a competitor to that, rather than it being the sole provider of volatility? derivatives? So that’s where we Yeah, that’s where we spent a lot of our time and we wanted to refine it. And we wanted to make improvements in the way that it was crafted. And I think we achieved that.
Jeff Malec 05:51
Do you ever lament that there was an I gave VIX type product on FX? Right. So you had to trade the actual instruments to get the volatility exposure in the FX contracts?
Simon Ho 06:02
Yeah, actually, we did there.
Jeff Malec 06:05
Were you kind of create a synthetic one for lack of a better word? Yeah.
Simon Ho 06:09
Yeah, exactly. So we would obviously have to figure out what the hedge would be. But effectively, we we could offer those those types of things to clients. Now, it’s a bit different in that one’s a listed product, and therefore that attracts sort of greater volume, whereas these other ones are a bit more ad hoc, you know, and designer things because someone might want a knockout at a particular level or something like that. So the ethics stuff that we did was certainly much more modular than it is in in the listed space.
Jeff Malec 06:39
Yeah, that’s a whole nother world. We’ll leave for another time but of the napkins and knockouts, especially over in Asia. And what I’ll just quickly ask you what your view is, is that a big outlier possible event? Downside event waiting to happen? When a lot of those, right you hear some people say like, there’s huge. If some of these knockouts get hit, you’re gonna have huge selling out of Asia. Other people are saying it’s, the banks haven’t hedged, it’s fine. It’s not gonna be a big problem. So curious on your views of that, even though we’re going on a bit of a tangent?
Simon Ho 07:11
Well, no, no, that’s all right. I mean, you’re, you’re digging into some pretty interesting stuff. So that I had, there is a very massive customer in Singapore, who will not be named. But they, they, that we did a pretty big trade for them. And thankfully, it sort of turned out, right. But that was something that actually was quite scary, because the size of the thing was pretty massive. And as you as you pointed out, there are knockouts and stuff. And in this particular instance, that I’m talking about, there was a very big knockout. And ultimately, it did get knocked out. And of course, at that point, you’ve got a scramble to get all sorts of hedges together. I mean, you’re doing it prior to that, obviously, you were aware that something like this can happen. So but it’s just one of those things where you typically you hope it doesn’t happen. Obviously, it depends on which side of the trade you’re on. But no, that was kind of some of the more hairy things that you could get in the OTC space, and that you’re referring to. These are quite difficult to manage.
Jeff Malec 08:10
They’re basically massively short gamma. So as it gets closer to that knockout, they have to scramble to hedge it more and more. Exactly, yes. And then I always get confused as they bank short, the game or the client. Depends which way they go. Yeah, the bank, probably both they know, whatever they want to sell whatever the clients want to buy. They’ll take the other side. Exactly. And then you mentioned all those wonderful places. So which, which was your favorite Sydney, Singapore, New York, London.
Simon Ho 08:38
Ah, you know, each one of them has their own charm. Like when I went to Singapore, I was adamant that I Oh, and Singapore is not that great. But I had a really good time there to be honest. I mean, it was it was very good. And frankly, that’s where I cut my teeth trading options. And that’s where I went a lot. So I really did appreciate that opportunity. I really, look I enjoyed JP Morgan as well and very good organization. But I think the best fund that I had, I suppose was probably at Goldman Sachs in London. i The team there was extremely good, and I learned quite a lot from them.
Jeff Malec 09:14
Did you run into Charlie Magara over there? Thank you. He was London Goldman head of commodities around the same time.
Simon Ho 09:21
Ah, right. Yes, yes. Yes. I know his name that Yeah.
Jeff Malec 09:24
I might be mispronouncing it. He was here on the show. And then whenever I have a Goldman person on former Goldman I asked him, Are you which camp are you in? It was it’s a okay company, or the vampire squid just make money. No matter the consequences? Right, which has been portrayed in the media. It’s like, they’ll do anything to make a buck.
Simon Ho 09:48
No, I certainly did not have that experience. I can tell you that for sure. We had a, frankly, a crack team. I think that everybody had a very good role to play and it was very synergistic and And, yeah, I know there’s I couldn’t fault it now and I didn’t buy into that squeak thing, I didn’t see anything that was, you know, I adore that different, I felt like the caliber of folks there was was very high. And that rubbed off on everybody. So I think it was very positive
Jeff Malec 10:22
so then you start moving into offering some of your volatility expertise to some different hedge funds.
Simon Ho 10:31
Yes, exactly. So what we wanted to do is expand the realm of activity. And one of those things was to help hedge funds to either generate alpha, that’s one thing. And the other thing that was a byproduct of that as well was actually to then start thinking about doing tail risk hedging. So obviously, a little bit different cohorts. But nevertheless, we ended up doing both of them. So now, it wasn’t hugely long lived, because market started to simmer down. And from that point on, you know, these things, earthquakes don’t happen all that often. And so you have to wait for that for the specific period. And so we did very well for our clients. But from there was then we started turning our attention towards the creation of these new indices.
Jeff Malec 11:21
And that was post internet bust or post financial crisis. Like when when people were wanting tail risk and stuff? Yeah. So
Simon Ho 11:32
certainly after 2008. And then we were we were we were very well versed, when it actually happened in sort of 2018, for example, when that when that, you know, disaster happened. So,
Jeff Malec 11:45
but that’s interesting to me, right? Everyone rushed in after the storm, wanted all these products, and then spent two, three years with the exposure and then started to give up, right and CalPERS famously here in the US right before COVID Got rid of their tail protection. So yeah, what? How do you view that a people That’s just human nature, or you think there’s problems inherent in the products that they’re investing in? That doesn’t allow them to stick with them?
Simon Ho 12:13
Who that’s, that’s a vexing vexing question.
Jeff Malec 12:17
no easy answer to that.
Simon Ho 12:19
That’s right. I think there are certain strategies that one can deploy, we have one in particular that we kind of like, but obviously, it’s not, you’re not gonna have the same remedy for everything. Right. But by definition, you’re going to have to sort of tailor it to some degree. So yeah, so we did that. And it worked out pretty well, very well for us a couple of times already. So but again, it’s a sort of thing that it’s not like I would necessarily go to that if the circumstances were not warranting it, if you know what I mean. But yeah, so we we actually were the some of the proponents in involved in one way or two strategies. And those were particularly good. And the timing, as it happened was particularly good.
Jeff Malec 13:06
They were dig into the one by two strategies for the listeners case, I don’t know what that means.
Simon Ho 13:11
Sure. So it’s a it’s a strategy that is designed to help with this tail risk events. I have a very large screaming high VIX slash spice, Spike the price. So if volatility is rising a lot, what you can do, if you’re if you’re expecting that to happen, you could sell one option and buy two options. So effectively, what you’re trying to do here is to not bleed away too much carry. But if something were to happen, you end up, you end up net long one volatility, obviously, you do more than just one. But this is a scenario where basis, and then you end up with a safe, effectively blue sky. And then you have to just make a decision as to when you think you’re going to get out because obviously it doesn’t go up forever. So that’s the kind of strategy that we’ve employed pretty well over
Jeff Malec 14:03
the past couple of years. And that’s what my naively I’m like, why not just buy the one contract and instead of doing the spread, because 90% of time that you don’t get to the other two.
Simon Ho 14:15
Right, exactly. That’s exactly right. So that’s why you put that program together. And it means that you’re not going to get as hurt from the decay and all that kind of stuff. If if you do it in that fashion.
Jeff Malec 14:28
And you have you seen that generally be at zero cost, or it’s a slight cost. What’s the carry been on that train?
Simon Ho 14:37
Yeah, so it’s typically around zero. It depends on how aggressive you are at the beginning, like how you want to stack it. So you know, some people it’s typically it’s one by two, but you know, you can always change those ratios and you know, define it a little bit more based on what your thoughts may be, but typically it’s one by two.
Jeff Malec 14:58
And then the danger is your How to short the belly. Right if it rallies above the short strike, but not enough to spike the long strikes.
Simon Ho 15:06
Exactly. That’s right.
Jeff Malec 15:13
We mentioned SPIKES. Let’s dig into the SPIKES index and what you’ve done there is and I saw us do VIX slash SPIKES, that’s going to be hard for me. So I’m trying to stick on spikes here instead of VIX. But like, let’s start there. Like everyone thinks of VIX is this thing that, you know, came out of the earth. And it’s just a thing that is in the market, but it’s an actual trademarked name, right? Like, yeah. So it’s not people have it’s synonymous with volatility, but it’s actually just a product that measures volatility. So it’s Coke and you’re saying, Hey, here’s Pepsi.
Simon Ho 15:50
Yeah, exactly. That was kind of the, you know, the now rationale for it. I mean, it’s, it’s not going to necessarily be like that. But when when we were thinking about it, you know, as I said, I had been a longtime trader of VIX anyway, just because I love this dimension of volatility, I can’t get enough of it. And so we kind of thought, well, maybe there are certain things that we can improve upon on this. Now, clearly, you know, VIX is a fantastic brand. It’s been around for a long time. And so as the second comer, you’re obviously, you’ve got a lot more barriers to entry, because you know, people know the product. And they’re comfortable with it. And so it’s quite difficult for us. And that’s hence why I refer to the Pepsi and Coke, because they’re both kind of very similar. But you know, people have preferences for one or the other. So we decided that we would go ahead and try and improve upon things. So for example. VIX has in the past had some issues, whereby if on the continuum, all of the strikes, and they’re usually about 200 strikes or so that go into making the index. And if you’re missing one single option, then you have a bit of a break, you can’t actually publish the value. So we addressed for that. And so ever since 2017, when we went live, there has not been a single moment in time where our index hasn’t been up. Whereas occasionally that happens in the VIX. Now, I’m not pooh poohing the VIX here, I’m just simply cast one against the other. And we obviously have the benefit of hindsight too, right. So when they did it, so.
Jeff Malec 17:25
So what does that look like? There’s 200 strikes, and it’s the 30 Delta. Right? It’s basically some out of the money thing that nobody has traded there. So there’s no price for it. Exactly. That’s right. And that can happen quite often seems hard to believe on the SPX. I’m like, no, why isn’t everyone in the world trading all the strikes? But I guess, yeah,
Simon Ho 17:46
yeah. Look, I’m sure that they’ve put things in place to remedy that kind of stuff. But it’s certainly when we were thinking about it originally, you know that that was the case. And frankly, as I said, you know, it still does happen. It happens at a lower frequency these days than it did. But for a time, it used to be quite regularly. So that was a shortcoming. And what we did then is we created a new mathematical device, which basically enabled us to do it without having any such things. And as I said, since 2017, it has been smooth sailing the whole time. So that has been something that has been pretty good. And the other thing about it too, is it enabled us to calculate or disseminate the prices of our spikes index at 100 millisecond intervals. Whereas it’s 15 seconds in VIX. Now that’s a gargantuan difference in dividends right? Now, you might just say, Well, I can’t really use that. But frankly, some people can be mad. They must be high frequency folks who would like to look at that kind of stuff, right? So we wanted to do things to try and differentiate ourselves, obviously from VIX, but also, you know, the good parts of VIX, you know, obviously, we try to replicate and do at least as well, if not better.
Jeff Malec 18:57
100 milliseconds, what? That’s a 1,000th of a second or no 100 milliseconds, or it’s yeah, a 10th of a second. Someone, someone can put us in the comments, check our math. And I don’t know if I know how to help time math works. Proving that we’re not high frequency traders, where that would be right in our lingo, right. Yeah. And so going back to just the calculation, and right if those can have a missing print and not print the VIX, can’t you? Also, if it’s super thin in some of those strikes, right, people could game the game the index calculation. Ah, okay. I’m very glad you asked that. And yeah, and how do you guys handle that?
Simon Ho 19:41
Yeah. So basically, we created the new method that I was talking about there, and which basically means that the last price is the most important price. If there is some movement, then you will move to the new one. But so what that means is that we are never vulnerable to With the fact that there’s always options that are there to complete that entire spectrum of things. So we never have an outage because we always have those options, have those had those options available? Now, another thing also is that it’s 100 milliseconds. I’m so sorry. That’s, that was my bed. So it’s actually printed printed at 100 millisecond increments. So, yeah, so basically, we have this thing called price dragging. And if there is no update in one of the options, let’s say, you know, 200 plus options that goes into this, then you would leave it alone. And only if it if it is actually higher or lower, would we then change it? And that gives us the, I guess, the bedrock for this thing not going up or not or not, or not giving the correct values? Essentially. That makes sense.
Jeff Malec 20:57
Yeah, like it’s sort of a weighted average of those. So the newest price takes is weighted in or it has full priority over the past prices, it does
Simon Ho 21:05
have full priority only until the price is the price has moved higher or lower, in which case, then that becomes the latest point. That was assumed in the index.
Jeff Malec 21:16
Go. So we’ve got the the math for missing option prices, we’ve got the time is better, what else separates it?
Simon Ho 21:26
Well, from a from a pricing point of view, we have been offering for the longest time zero and clearing fees. Now that’s that’s pretty amazing. Especially when you consider that VIX is a very high priced product. Right.
Jeff Malec 21:43
Let’s back up a real quick second. So the SPIKES index lives on its own. It’s calculated every day by index provider. Right. And then there’s now futures on the SPIKES index. Right. So we’re talking two separate things. There’s the index itself, and then futures SPIKES futures, which is MIAX, right?
Simon Ho 22:01
Correct. Yeah. MIAX is the exchange that we work with. And use, right? Yes. Yep. No problem. And so yeah, I mean,
Jeff Malec 22:11
so you’re saying in the pricing wise, the index pricing doesn’t matter index is an index, but you can’t trade the VIX anyway. So there’s no pricing on the index. The futures is where the pricing comes in. So yes. So no clearing fees for now. No exchange fees, I would call and then eventually, that’ll change as it gets more popular, but the goal would be for them to keep it below the CBOE, I guess.
Simon Ho 22:36
Yeah. I mean, as the second coming to the market, as we took we spoke about earlier, they have a branding advantage, because they’ve been doing nothing longer, right. So, so there’s that we, we need to we need to impress upon people that we have something here that is equivalent or better than that which exists today. And so there are a number of features that we have that will actually answer that question. And so we, we are at the moment, we’re doing it with zero fees, because obviously, we’re trying to attract people to come in. But one thing that the customers or the people who are listening here should should know is that the correlation between SPIKES and VIX is 99.9% correlated. So effectively, they are the same thing. But obviously, because we’re a second mover, we need to prove to people that this thing actually does what it says despite the fact that it’s 99%. People need to see that for themselves.
Jeff Malec 23:36
And how do you achieve that? Without replicating exactly what they’re doing? How are you achieving that versus what they’re doing? Is from my understanding, SPX Versus SPY.
Simon Ho 23:48
That’s exactly what I was just going to say. Yeah, so essentially, one is on spy vol. One is on SPX, Vol. But ultimately, the again, the correlation between those two is extraordinarily high. And so that that gives us this 99.9% relationship that we have between SPIKES and VIX
Jeff Malec 24:04
derivatives. And so it’s still on the same whatever 200 strikes or whatever that formula is for calculating which strikes to consider why instead of SPX
Simon Ho 24:16
exactly the methodology there is somewhat different, because, you know, the sizes are slightly different, but otherwise, yeah, I mean, you’re talking about my new difference.
Jeff Malec 24:25
Yeah. And would that even be possible if ETFs weren’t so popular? Right? If the if SPY was only 15 million or something and had a big bid ask spread and no options activity? Right? It’d be.
Simon Ho 24:37
Yeah, clearly that that would that would cut us at the knees. Yeah. You need you need a you need a big slew of options in order to be able to get a really reliable value for fix and the spikes.
Jeff Malec 24:58
So I’ll back up a little like a lot of People are upset with volatility long volatility this year, right? Because there’s been this, the markets down 20% volatility hasn’t really moved, it’s been rather stagnant. A couple of brief spikes, but a lot of right hasn’t sold off heavily and it hasn’t spiked, really. So part of me is like, Oh, these guys have figured that out, they’re gonna go with like, fixed strike ball instead of, you know, floating ball. So just how do you think about that? What would you say those people are like, balls not working? Why didn’t right, why isn’t spikes at? Why didn’t it go up? 30% today or yesterday, when the Fed announced? How do you kind of just view Vall in general is this year not working? Quote unquote?
Simon Ho 25:40
Yeah. So I wouldn’t categorize it as not working. But I definitely understand what what you’re saying. It is very peculiar. I think anybody who’s a volatility watcher is quite stunned by what’s going on. Right? Because you think Well, I mean, the inflation is going through the roof, you know, interest rates are skyrocketing. And I think part of the reason for this is because we are talking about a different asset class. Now, it may not be the world’s best answer. But if you try and dissect it, all the action right now is in interest. So is in the interest rate market sphere, right. And so there to some extent, VIX has kind of spikes on its own for the moment. Right. And I think that’s probably what’s happening. It is very unusual. I agree with you with, particularly with all the stuff that’s going on and the the extent of the rate rises and stuff that is going on, and the amount of inflation that there is. It’s just, it’s a little bit beguiling. But I have to say that it does kind of make sense because I think people’s eyes and ears right now are focused on interest rate sensitive things, as opposed to stocks. I, obviously, as a longtime vix trader, and everybody on this on this podcast is, you know, it normally doesn’t behave like this, you know, if you’re if you’re getting interest rate moves like that, typically, you’ll find that, you know, volatility rising as well, on equities. And that just hasn’t happened. I think people are just focused on the bigger issue right now, which is inflation and rising rates.
Jeff Malec 27:10
Well, I think the SPIKES has a good name for that, right? Because people equate the VIX to oh, it should go up when the market goes down. Whereas SPIKES is a better name, commentating? Like no, this is for, I wouldn’t say it spikes down, right in the S&P, not just down down for SPIKES. And I’ve always I heard someone say, like, think of volatility as the right, you’re on the ship with the radar screen. And okay, here’s a couple enemy ships that just pop onto the screen, and you get that ping, that’s the volatility spike. If they stay on the screen, you’re not getting the big ping anymore, you already know they’re there. So it’s kind of like, it only spikes when a new enemy comes into the radar screen. So once we know all this stuff, we the Feds telegraphing, they’re going to raise rates, you know, everything all that comes together to be like, Well, yeah, the markets going up and down. But spikes value of x, which I got to ask you that in a second. But I’m missing, right? A vix of 30 means we’re going to have these 1.3% moves a day or whatever. And that’s what we’re getting. So from that same point, I can argue like it’s doing exactly what it’s supposed to be doing.
Simon Ho 28:18
Yeah, I agree with you. 100%. A lot of people often say, Oh, look, you know, SPIKES or the VIX. They’re broken or whatever. That’s that’s not the case. I mean, it’s just, it’s a function of what’s the most critical thing to think about right now. And certainly for for us in the equity world. It’s it’s simply not equities, as you say, people are definitely focused more on the interest rate side of things just because of where we are in the business cycle. So yeah, but it will, it will certainly revert. It’s not like vix and spikes is going to disappear at any time because these have fantastic utility, and people are going to continue to want to trade them obviously, because it hedges extremely well when it comes to equities.
Jeff Malec 29:02
And then talk about what’s the pricing, not the pricing, but the value. So a VIX of 30, SPIKES is going to be 30 or 30.01. Or what does that look like?
Simon Ho 29:12
Oh, well, um, as I mentioned earlier, like it’s 99.9% correlated. So the
Jeff Malec 29:17
moves are correlated, but even the price itself is kind of a mirror image.
Simon Ho 29:22
Very, very close. Yes. Yeah. Okay.
Jeff Malec 29:25
Yeah. Right, because it almost has to be because that’s, that’s a volatility reading. So you can’t be couldn’t be three, right? It’s got to be No,
Simon Ho 29:33
no, exactly. got they got they got to be very close. Pretty much all the time. Now. There are peculiar moments where SPY has a dividend. And so sometimes, when you’re going to expire on this particular date, for example, you know, it can be slightly different. But for the most part, as I said, when you look at the the values of SPIKES and VIX over time 99.9% correlated to one another, but there are Obviously, immediate points that were there, there will be differences, but they’re not. They’re not very long lived. And they’re not hugely meaningful.
Jeff Malec 30:09
Yeah. And then are there already options on the futures as well.
Simon Ho 30:15
There are options, we are trying to do a lot to improve the liquidity of that and to also make people more aware, because as the second mover, we need to sort of make sure that the clientele that is working with us understands all of the things that are going on.
Jeff Malec 30:32
Yeah. And then there’s an ETF, with using these two already write convexity shares.
Simon Ho 30:38
Yes, that’s right. So happily, on the 16th of August, we launched two ETFs. One is a one time so no, no leverage, and one is a 1.5 times and so we were really excited about that. We have some very, very good plans. And we think that this will be an integral part of the ETF volatility, ETF space.
Jeff Malec 30:58
No, short ETFs. Yeah.
Simon Ho 31:03
No, we made a conscious decision not to do that. So I’ve been trading volatility for a long, long time. And it just seemed to me that, especially when it was cemented by the 2018 debacle, they just for us, it’s it’s got too much risk from from so many points of view, right? It’s the risk of your if this thing blows up, it’s terrible for you. Now, it’s ironic, because obviously, those the two scariest funds have actually returned. Right? And ultimately, yeah, I mean, that’s always a challenge, if you’re short volatility, or if you’re leveraged, if something big happens, well, you know, that’s gonna have a fairly massive impact. So we deliberately stepped away from doing those things. And rather, you know, focus on, you know, the one and one of those times,
Jeff Malec 31:56
but it’s almost like a philosophical existential question, can you have the long without the short, right? Do you need the, the dark side to go with the light side of the Force? Right, like you don’t have these huge salaries is going to spike. But in your case, it doesn’t necessarily matter. Cuz it’s just tracking the spy. But that leads to my other question, like, you mentioned, 2018. Do you think at that time, the, the tail was wagging the dog, right? Like we got this big move in VIX. Some people were saying the settlement got gained. We’ll leave that be but right was, S&P was following what the VIX was doing when, by calculation, it should be the other way around. So just how do you think about that whole dynamic of can? Can the derivative of the thing get bigger than the thing itself?
Simon Ho 32:44
Yeah, you know, that period of time, just before, you know, in 2018, when just before everything blew up, it became obvious to us. And it wasn’t just us, I think the whole world pretty much knew what was going on. But three or four days, I believe beforehand, we knew that this was going to get out of control. And so it’s one of those things where, you know, they, as I mentioned earlier, and as everybody knows, these have been reinstated. And I hate to say it, but ultimately, it’s gonna do it again, right? I mean, it’s just it’s me, you’re waiting for it to happen almost. But it’s a matter of how much you can squeeze out of it before that happens, because everybody knows what happens in this in this type of instance, you it’s just, it’s a virtuous, no negatively virtuous cycle. No, it’s a bad cycle. Because basically, once you have something that’s not quite right, or looking dangerous, then everybody kind of it’s like everybody who’s trying to get out of the door at exactly the same time. And that’s what happens with those kinds
Jeff Malec 33:43
of funds. But what do you see the problem? They’re that they’re short, and as the market goes down, they have to sell more to rebalance into there. Yeah. Yes, exactly. So it just it feeds on itself. Yeah. And then even on the other side, right, like Credit Suisse terminated the TVIX, because I think they got spooked. Right? They had the the COVID spike. I can’t remember what the numbers were. But I think there was 80 billion or something. Right, the the amount of assets that it was an ETN. It was their note. Yeah, so the note was larger than the bank itself.
Simon Ho 34:20
Yeah, exactly. Which is, which is another cautionary tale as to why we chose to take this much sort of more consideration considered, I guess, levels and risk profile, because it’s just not worth it. You know, look, some people that obviously they back out there, right. And so people want these products and they are loved by many people. People, just the investors just have to be aware that at some point in time, this thing is, you know, going to do what it did before. It just depends on what the catalyst is and how long it takes for that to
Jeff Malec 34:54
show off when it could be one year, five years. 10 years.
Simon Ho 34:58
Jeff Malec 35:06
So your you technically work for T three indexes. But then you’ve just done deals with my x deals with what’s the ETF, again, convexity shares? Yeah, so conventional, how does that work? Or is it all three combined in there? Or? They’re separate companies? And you’re kind of advising for them?
Simon Ho 35:27
Um, I think the latter. So yes, we are. So my X and T three, put a joint venture together for the ETFs. We work very closely on a number of things, T three indexes, the company that I run and we are working on some other products as well, which which we are going to work with my exon two. So for example, we created the first ever bid vol, con derivative contract, and that has actually traded OTC, we also have an EthVol index. If you and your listeners would like to see you can go to see a lot of the stuff that we do on our website called T three index.com. And you’ll see that EthVol contract and so on. So we’re trying to commercialize those things going
Jeff Malec 36:14
forward, what what are those priced at? Right? What’s the EthVol 80 or something?
Simon Ho 36:21
Well, let me just get it, I’m gonna get it up on my computer. So T three, okay, here we go. So if you type in T three index.com, you’ll find that as well under the indices tab. And it’s just go to crypto. Alright, so now you click on here. The Vault is actually bid vol today is really relatively low. It’s only 75 Vol. You know, you can get a sense of kind of what it looks like, but certainly had a lot of interests. A lot of people sort of not, it hasn’t traded a lot. It has traded a few times, but there’s more and more interest. And but also this this crypto winter. Winter didn’t help anybody either.
Jeff Malec 37:07
Yeah. But on the web, so it spiked up to 108 at 75. Pretty kinda looks like it stays around 75.
Simon Ho 37:17
Yeah, I think that’s more recently, but prior to that, you know, it was
Jeff Malec 37:22
March of 2021 90.
Simon Ho 37:24
Yes, exactly. And that’s why I mentioned
Jeff Malec 37:28
Simon Ho 37:30
Yeah, yeah. So this seems incredibly volatile. And also on that website, you’ll also see skew indices that we have, and people like to see those. We have a vial of spikes of the SPIKES index as well that people can look at, which is, I guess, a corollary of the of the of the VIX version, but ours is on SPIKES, obviously. So yeah, there’s quite a few things on there. And
Jeff Malec 37:53
that you can look at what’s the seven day spikes.
Simon Ho 37:58
So we have that just as an index that’s not tradable at this point. So we were sort of thinking about, we have a lot of other things on our plate at the moment. But that’s one thing where we created the index, it’s out there people can see it, but it’s not yet a tradable thing.
Jeff Malec 38:14
And then target you mentioned skew index. So talk to me a little bit skew. I think it’s pretty widely misunderstood by people of whether it’s a indicator of bullishness or bearishness, do you have any views on that?
Simon Ho 38:30
So well, technically, that’s not Yeah, that’s that’s not the way it should be viewed. Basically, you’re looking at the skewness of the distribution that comes with having a volatility index like this. And so that’s giving you insight into, you know, the left side of the tail, the right side of the tail, and that can give you some cues. Now, I’m not saying that this thing is something that people would use, necessarily, but it gives you extra context around the shape of the distribution at any point in time. And so I think that in and of itself, is is worthy for people to look at because that gives them some insight as to what the distribution looks like at this particular point,
Jeff Malec 39:09
where in most cases, it’s skewed towards the put. People want the protection more than the upside. Talk a little bit. A lot of people complain about the VIX futures. That basically getting in and out in the contract size is too large, right if it’s $50 I believe both sides so what is the you have the same multiplayer there? What’s the multiplayer on the My ex features?
Simon Ho 39:34
Yeah, so. So those standard things are consistent with one another between the two. But we are making a number of changes that will, I think, be very welcomed by the community. The trading community can’t reveal all just yet. I know that I’m hanging these We hope to remedy the issue that you just raised. And I think that so the minimum tick is actually point out one. On SPIKES futures. Oh, wow.
Jeff Malec 40:12
Right versus I guess it’s five. Matt, what is it on fixed futures? Oh, five. So five verse one. So it’ll be in theory, that’s whatever that is. And you can see that it’s more efficient.
Simon Ho 40:28
Yes, absolutely. And I think that’s gonna make a big difference. And as you can see, it’s public as of right now. So you have the scoop the skinny,
Jeff Malec 40:35
we got the scoop, breaking news here on the derivative, my ex moving 2.01. And then like, what kind of do you guys do any research of like, how do these new futures contracts make it a lot of them don’t make it and just said, Hey, we’re gonna we gotta give it a shot. We believe in this. Right? Because I think a lot of people would look like, oh, I can’t read if you’re trying to create a new Euro dollar future, like, forget it. It’s just, it’s entrenched, you never get there. And there have been a lot of people who’ve tried right to compete with the CME on this. And so just what are your views overall of like, trying to take down the 300 pound gorilla?
Simon Ho 41:13
Yes. So that is a really vexing question. It’s very difficult to take over an incumbent, especially someone who, as you mentioned, CME, for example, if you’re trying to look at the Eurodollar, futures and whatnot, how are you going to break into that, because everybody understands it, it’s been around for forever, you know, so it’s very difficult to dislodge things. However, it’s not impossible. And I think that we are making incremental great gains, with our product, with SPIKES versus VIX. And we, we certainly have the belief that we can do it, and we’ve got, you have to think outside the box. That’s the real problem, not the problem. But that’s the real barrier to entry, because you can’t simply make a facsimile of something else, and hope that you know, that costs alone will be the driver for them to move from one to the other. So that’s not going to happen. But as I said, I mean, we’re not going to reveal all of the secret sauce. But you know, we are certainly mindful of the fact that we need to differentiate in order to get people to move across to us and to have a reason to want to move.
Jeff Malec 42:20
Yeah. And it’s like a multi layered problem, right? Because it’s not just having a better product, you have to have the liquidity, right? Because even I can be like, I love this product, this thing’s better. All the terms are better. But I can’t go there as a billion dollar hedge fund until there’s enough size to support my trading. So it’s like a chicken or the egg of like, how do you get the how do you get the liquidity in order to get the liquidity?
Simon Ho 42:45
Exactly. And the chicken and the egg is the thing that is probably most bandied around in my ex, because obviously, we come up against giants. And so we need to be smarter about what it is that we do and the offering that we can give to clients so that they want to make the move to make the shift. So look, we’re confident about the MIAX team. Fantastic. And you know, they’re we’re putting our heart and soul into to making things better.
Jeff Malec 43:21
Wanted to ask you, Simon in the past couple of days, right, we’ve had the Fed announcement, we were going down to new lows today. How is it reacted? Is this been kind of the first stress test of some kind of really volatile intraday markets? And is it been okay, everything working as it should be?
Simon Ho 43:41
Yeah. So as we mentioned earlier in the conversation, we were talking about the robustness of spikes of the SPIKES index. And as we mentioned there since 2017, we have had absolutely no no issues with it whatsoever in terms of printing and having the right values. And so I thought I’d bring it to your mind that today you
Jeff Malec 44:04
sent me a chart I’ll pull up while you’re talking about. Yeah, sure.
Simon Ho 44:09
So in this case, here, you know, we had a Fed event. And that led to a rise in volatility for this sort of only momentarily, but that’s what we can see here on the screen. And the difference between the two. In this particular instance, there you can see that SPIKES registered a value of 27 whereas VIX was 30.18. Now,
Jeff Malec 44:29
in SPIKES for those who can see this is the orange there.
Simon Ho 44:33
Exactly. And so you can see here that it doesn’t quite look right, you know, and the thing spiked, and then no pun intended, and then it came back down straightaway. So it’s one of those things that I think really showcases the the strength of the actual index and the robustness of it. And as I said since 2017, we’ve never had a single millisecond of outage,
Jeff Malec 44:55
but in my brain goes to well, you know, it’s you want it to spike. It’s the VIX. But if it’s Not real. Yeah, yeah, I guess you don’t want it.
Simon Ho 45:03
Exactly. Yeah. You want to have you want to have faith in the metrics that you’re getting, you know, so just because it’s a higher level doesn’t doesn’t mean anything. I mean, it could be more than likely means that it’s not quite right. You know. So that’s something that we need to be mindful of.
Jeff Malec 45:19
And this is the index itself or the futures. This is the index itself. Yeah. And so being volatility trading, probably just what are your thoughts on the rest of the year? Do we stay here around 2530? Have we moved to like a whole new regime where we’re always in this higher VIX spikes? All right. What are your thoughts?
Simon Ho 45:42
Oh, that’s the million dollar question. Yeah. My crystal ball. Is that, I think, well, as you mentioned, early in the conversation that we had, it was peculiar, it seems quite peculiar, given the lack of movement index, given all of the things that are going on around us where things are imploding and exploding. I don’t think obviously, that’s not going to continue, you can’t have a dichotomy that’s so large between those two, eventually, you’re going to have these things normalized. I do feel as though we’re not yet out of the woods. So as far as my money goes, I think that you’re way more likely to see the VIX rise and SPIKES rise, rather than the other way around for the time being at least.
Jeff Malec 46:28
But just mathematically, couldn’t we couldn’t you have a scenario where the market goes down 2% a month for 20 months? Right? And volatility would be next to nothing. So the SPIKES in that red case would be quite low?
Simon Ho 46:42
I don’t I don’t think so simply because, you know, if you think about the backdrop of all of the things going on around the world, like the Ukraine situation in Russia, trying to blow them up and and oil prices and stuff. It seems like there’s a heady mix. And it’s almost like volatility is the only thing that hasn’t really ruptured yet. So I don’t think it’s a situation where the VIX and SPIKES are going to continue to recede at I think, if anything, it’s likely more likely to be the other way around.
Jeff Malec 47:11
But I’m just saying mathematically in the calculation, you could construct a scenario where the market goes down a lot. And volatility does not move, right. Agreed highly unlikely, because you’ll have people who want to buy dips and people who want to sell rallies and all that. But in mathematically, it’s possible, which I feel like it’s some of what’s happened this year, if you’re just mathematically the moves have been within the expected moves. Yeah, that’s the end of the day. That’s the definition. It’s an expectation of what’s going to happen and speak to that it’s the same, right? It’s the define what’s the 30 day pricing, and it’s a rolling 30 days.
Simon Ho 47:51
Yes, yes. So the mechanisms are not wildly dissimilar to the way the VIX is constructed. So that’s kind of nice. And but
Jeff Malec 48:01
but yeah, maybe just talk through that for a second. Because I don’t think a lot of people who trade and know the VIX even know how that calculation is actually done. Just in terms of time, and the look, look back or look forward.
Simon Ho 48:15
Right, so So essentially, if you’re talking about the creation of the vol index, yeah, right. Yeah. So in our case, we’re using spy, obviously, with with VIX at SPX. And those are the constituent options that go into the creation of the index level. So what happens there is you’re looking at the entire skew, we meant we obviously mentioned skew earlier. So it’s kind of kind of handy. You look at the highest call all the way down to the highest points of the rather than lowest foot. And then you sum the sum of those things with the mathematical formula, and out pops a single value, which is
Jeff Malec 48:50
so there are 30 days to expiration options. Yes, right.
Simon Ho 48:54
Yep. Yep. For whatever reason, that’s, that’s the particular timeframe that was used. And pretty much anyone who does a volatility index these days, typically, you’re going to use the same thing.
Jeff Malec 49:06
Right, which is interesting. Like, why did you look at that or think of that? Like, hey, what if we did a 90 days to expiration? volatility? Yeah.
Simon Ho 49:14
Internally, we have done that we’ve got multiple multitudes of versions of these things. So but the problem is that people are used to the 30 day. Yeah. And it’s very hard to dislodge that. And sometimes they might say, well, what’s the point of knowing the 90 day but yes, yes. Obviously, it’s very easy to compute that once you have the methodology at hand.
Jeff Malec 49:33
And then are there right now you want people to be able to arm between the two. And do you see any of that happening of like there’s potential for are between the two.
Simon Ho 49:43
You mean, between the short
Jeff Malec 49:44
and the long or between now between SPIKES and VIX? Yeah.
Simon Ho 49:48
Well, as we mentioned earlier with that famous 99.9% number, it’s already there. I mean, they are effectively facsimiles of one another and The only differences as we mentioned earlier, which is just occasional, but sometimes there’ll be differences between SPIKES and VIX. And that’s because I think, if I’m allowed to say I think ours is constructed extremely well.
Jeff Malec 50:14
Yeah. But they’re not. They’re fungible or not. Probably not.
Simon Ho 50:19
Well, it depends if you think 99.9% correlations fungible? I
Jeff Malec 50:23
don’t know. I mean, like, actually at the FCM level of like, okay, the your long spikes offsets against your short fix.
Oh, right. Yeah. So
Jeff Malec 50:35
like, if I, in the old days, I had one big S&P, they don’t offer it anymore, versus five, you know, if as long one big SP, short five E Mini S&P, they would fund your gate funds again, that the word
Simon Ho 50:48
o funds, you are fungible, maybe
Jeff Malec 50:51
yes, are fungible. But you’d think that there’d be some high frequency guys or some prop firms that are like, Okay, I’m right at the offer in VIX and I’m on the bid in SPIKES. And if I can get them to line up and I can grab a penny, especially with the increment change that could come into play, too.
Simon Ho 51:09
Yeah. And I also think that Well, one thing to note is that the OCC MDX have across margining in the works. So that’s really going to help us a lot, I think. So that’s a very, very good development for us.
Jeff Malec 51:23
And I meant to ask that, too. So there were there’s there’s options, but those are security. Those are futures. There’s options on the futures, securities options. Yes. Got it. So just like now, if you’re trading VIX options, that’s a security.
Simon Ho 51:44
We are planning to expand. Obviously, I can’t reveal anything at that moment. But we are looking to expand our offerings as well. So it should make it easier for people.
Jeff Malec 51:59
All right, Simon, send me an invite to come visit you and I’ll be there in two minutes. Come in here in Chicago.
Simon Ho 52:08
Yeah, that’s that’s going to be tough.
Jeff Malec 52:10
Any last thoughts?
Simon Ho 52:14
No, look, I really appreciate the opportunity to speak with you about this and our products and the folks that my ex I think we’re doing a really good job and for people who don’t know about SPIKES and the ecosystem that we’re building, I certainly encourage you to take a look because
Jeff Malec 52:30
you get mad like the CBOE if people call it the SPIKES index, right, CBOE gets really mad if you call it the VIX index, like no, it’s just VIX. VIX implies it’s an index.
Simon Ho 52:44
I could care less about that to be
Jeff Malec 52:46
good because that nomenclature drives me crazy. Like, who cares? And then we ask all our guests I didn’t prep you for this, but you got to hottest take
Simon Ho 52:57
on us take. Yeah, no, that means
Jeff Malec 52:59
that Australian football is better than American football or you know, something a little controversial, either inside the volatility space or outside of it or wherever you want to go.
Simon Ho 53:12
Oh, that’s a good one. You’ve got me on the spot here. Yeah. I’m gonna say that Australian beaches better than American beaches. Hardly hotly contested, really. But
Jeff Malec 53:23
yeah, I would say that’s pretty, pretty easy. Awesome. Well, thanks for your time. Good talking to you and we’ll talk to you soon. Best of luck with the spikes, the spikes index, whatever you want to call it, just call it spikes.
Simon Ho 53:38
Thank you very much for having us. Really appreciate it.