In this lively episode of The Derivative, Jeff Malec sits down with NASDAQ’s Kevin Davitt and Nick Smith for a deep dive into the wild world of index options, with a special focus on the NASDAQ 100. These guys break down everything from the evolution of options trading to why the NASDAQ 100 is becoming the cool kid on the financial block.
Kevin and Nick bring their A-game, unpacking the index’s unique volatility, global revenue streams, and why younger investors are totally crushing on this benchmark. They don’t hold back, diving into spicy topics like AI’s market impact, the rise of zero-day options trading, and how derivative strategies are getting seriously sophisticated. You’ll hear insider perspectives on tech trends, market dynamics, and why the NASDAQ 100 might just be the future of investing. It’s part finance lesson, part crystal ball gazing, and totally packed with insights that’ll make you sound smart at your next happy hour.
Whether you’re a trading pro or just finance-curious, this episode is your backstage pass to understanding how index options are reshaping the financial landscape in real-time. SEND IT!
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Check out the complete Transcript from this week’s podcast below:
NASDAQ 100, Options & Volatility: 0DTE, Tail Hedges, Structured Products — with Kevin Davitt & Nick Smith
Kevin Davitt 00:07
My belief is that, like at the index level, the NASDAQ 100 is coming to reflect the state of the global economy best in in 2025 and beyond the risk management tools that we sort of catering day after day will will grow naturally, and they and they have today.
Jeff Malec 00:31
Welcome to The Derivative by RCM Alternatives. Send it!
Nicholas Smith 00:36
Hi, this Nick, I’m Kevin, and we’re here to talk about index options on the derivative.
00:55
Hey guys, how are you?
Kevin Davitt 00:58
I’m great. I’ll start there. I’m doing really well. Thanks for having us on, Jeff,
Nicholas Smith 01:02
yeah, I’m doing fabulous. Thanks, Jeff, thanks for having us.
Jeff Malec 01:06
And where is everyone I know. Kevin lives somewhat near me here Chicago area. I am I’m in Evanston, not far from you.
Nicholas Smith 01:15
Love it. And contrary to my accent, I am based in Manhattan, South better known as Miami.
Jeff Malec 01:21
That is becoming more and more of a thing right now. Are there too many? Is it getting to be too many finance folks down?
Nicholas Smith 01:27
Never have too many finance folks. I never say that. But indeed, when I, when I turned up to Miami and back in the dark ages of 2018 I think the financing here was could best be described as parochial with a handful of hedge funds, and now it’s flourishing with a lot more sophisticated derivatives users. And you know, the market is moving accordingly. So yeah, we’re we’re enjoying the influx, and it’s creating some interesting conversations down here for me, some good happy hours to go to. For sure,
Jeff Malec 01:58
did the proper derivatives guys have to battle it out with the crypto bros.
Nicholas Smith 02:04
I think they hang out at different bars. Honestly, I really do
Jeff Malec 02:09
love it all right. So we’ve got the heads of index option sales and content here so we can basically talk anything and everything index options, which is exciting. I want to start with Kevin, who gave a little bit. We had an event in Philly A while back, and Kevin gave a eloquent. Was it eloquent? It was something, but it was well thought out. Kind of the evolution, how options evolution ties in with human evolution and societal evolution. From what I recall, Kevin, do you have some? Can you recount some of that for us? A little recap,
Kevin Davitt 02:48
I guess, just to set the stage a little bit when I think about like my role and content generally, I think there’s sort of a bifurcated market. I think there’s a great deal of content, a lot of it you you put out that is very, very tailored for high end and institutional end users. And the groups that RCM works with that many of them also work with NASDAQ, eat that up. And then there is a great deal of content that goes out through different types of channels that I would say generally panders too low. And when I’m talking about that, I mean, like the get rich quick stuff, and really the things that do not properly explain the risk inherent in any market. And so I try to do something slightly different, and and to to give the markets that we operate in which there is, of course, complexity, a bit of approachability, to to, you know that that huge array there, I think there’s a fat middle, and I try to give interesting spins whenever possible. And so that was something I tried to do with the Philly event. There are plenty situations where I know I’m not going to be the smartest guy in the room, but if you can frame a conversation and then allow that dialog to happen, which hopefully we’re doing today. I think really interesting stuff happens. So my thinking there was about evolution broadly. And you know, this is the type of stuff that happens when you’re walking the dog or whatever, taking a shower. And so conceptually, that’s something that Nick’s British brethren Darwin came up with in the middle of the 19th century, nothing new, um and but then I think it applies like much more broadly than finches and the Galapagos or like giraffes with longer necks. And I think there are very, very meaningful parallels. Between life broadly and markets generally. And I think that’s why so many people find them compelling. There’s complexity, there’s ups and downs to both, and there’s systems where a whole bunch of different actors come together. And so my sort of thinking there was that humans are capable of amazing adaptation, and I gave an example that most certainly wouldn’t be typically brought up in in a derivative kind of focused conversation, but just the fact that we’re as fetuses in what are we in? Whatever that pot is, and our lungs are wet, but we’re able to uterus, umbilical cord. What’s What’s that in the uterus? Yes, yes, that’s right, men, men, talking gestation.
Jeff Malec 05:52
Now, in the first three minutes of the pod, we’re nailing it today, folks. Yeah, we are
Kevin Davitt 05:57
anyway, like, seconds after we’re born, we adapt and we’re able to breathe the way we are right now, and this stuff we take for granted. But then I think about markets, and I think about the tremendous evolution that’s happened in the let’s call it, 25 years both of us have been in this business, tremendous evolution. And I think about volatility in the context of what we do, but I also think that change is constant in life, and that’s a little cliche, but again, another parallel with markets. And so if that’s the case, then we’re talking about, like, rates of change, and we’re talking about technology, and we’re talking about transactions happening and like it, just so I don’t get too long winded if I bring it all back home, my belief is that, like at the index level, the NASDAQ 100 is coming to reflect the state of the global economy best in 2025 and beyond. And I work with the likes of Nick to help drive sticky assets into that headline index, or vehicles designed to track it like futures. And then I think as as a direct sort of descendant of that, the risk management tools that we sort of catering day after day will will grow naturally, and they and they have today.
Jeff Malec 07:27
So is your team responsible for those ads like during March Madness, where the ladies like oh and the AI and everything’s inside of this? Or is that a Q, Q product commercial?
Kevin Davitt 07:37
That’s a good question. And so that is Invesco driven. We have a very, very meaningful when I say we, I’m talking NASDAQ. It’s not just the index options group, but NASDAQ has a very significant relationship with Invesco. So that’s their marketing dollars at work, but the awareness around that in particular, like just the fact that you’re bringing it up whatever were six months since. That speaks to the power of things like advertising.
Nicholas Smith 08:09
It’s fair to say that the anything that’s true of the NASDAQ 100 for the queues is also true of the NASDAQ 100 for the nd x index options that Kevin and I spend our time with
08:22
you. That’s
Jeff Malec 08:27
been a home run for everyone, right? QQ, like, could you have ever NASDAQ in general? Imagine such a right, not just that product, but then the move by everyone into ETFs welcome site, or did the NASDAQ and you guys see some of that coming?
Kevin Davitt 08:44
I have to imagine that there were people with NASDAQ that that had big, big dreams. Are we beyond them? Now? The honest answer would probably be yes, the ETF, if memory serves, launched in 99 and so early on, it was certainly a very different product, the constituency, the revenues, the profitability. One of the points I think Nick and I make regularly is that, or at least internally, but hopefully externally too, is that this is a very much more mature index than it was at the Q’s launch. Now, just so the audience is aware, the NASDAQ 100 is a tracking instrument, and calculation has been around since 85 so there is a much richer history there. But as far as end users really finding it accessible outside of a futures or a few mutual fund wrappers, I doubt that 2025, 26 years ago, when that product was launched, too many people thought we would be on the. Path that we are today. Honestly, it was part of my decision a handful of years ago to shift sort of the hat from looking to grow the ecosystem around the s and p derivatives to the one I wear now. And I’m thinking about I talked to you about this at a rooftop event you did, and previously, I got a kid that’s 10. You got a couple of kids, one in high school, and where are their passive assets likely to flow? What? What is the natural sort of benchmark for their generation? My belief is that the that that day in the sun, that dominant placeholder is coming for the NASDAQ 100 but maybe I’m just preaching to the choir here. I don’t think that’s out of turn, though, Kevin, anyone I speak to under the age of 30, is definitely looking at growing when they get to growing retirement savings, to grow that within names that you see in the NASDAQ 100 and the Nasdaq 100 is a natural sort of embodiment of a number of the trends that folks are looking to get behind when it comes to investing those those assets. So I definitely see that as a shift in the conversations I have, not even just inside my own work, but with friends and family.
Jeff Malec 11:16
How many people know it’s the NASDAQ 100 mainly, versus the NASDAQ composite. Does anyone talk about the composite anymore?
Kevin Davitt 11:24
Nick, I’ll let you take this one first, and then, like I’ll follow up. Feel like
Nicholas Smith 11:28
the NASDAQ 100 in part due to, you know, follow this conversation, right? Like we started talking about a NASDAQ 100 because that’s where you see the cues, ads, and that makes sense. Certainly, it’s an area of focus for Kevin and I the tradable instruments in the derivatives setting, if we’re going to talk about this from the namesake of the podcast, are NASDAQ 100 focused? And so I encourage folks to look at it through that lens. The NASDAQ Composite does indeed represent all the all the listed companies on our on our exchange, but the NASDAQ 100 provides this specific difference to its peers. And coming from twofold, coming from a country where the predominant equity index is a 100 so FTSE 100 and then also coming to a country with such a large and I am American now, by the way, been here for seven years, but so I consider myself vaguely qualified to talk on both on both sides. Yeah, but you exactly with such a such a expansive and and varied equity landscape, it kind of makes sense that there are these different different indices doing different things, and NASDAQ, 100 does a very specific thing. Kevin, your thoughts,
Kevin Davitt 12:46
I echo that. I would say indices, there has been an outgrowth of indices for many, many years now, and at a corporate level, NASDAQ, of course, cares about a barometer for every company that that lists on the exchange, again, not a business that I’m intimately familiar with. But of course, it matters when we think about which most of your listeners likely do, vehicles where there are assets designed to track them. Then it matters. Then people are putting capital to work. And of that massive choice set of choices that people have, the NASDAQ, 100 people vote with their wallets. That too is a little cliche. But where is money flowing? And even when you kicked off in the beginning with the talk of crypto, right? That is, there were years, not that long ago, where it was considered illegitimate, but people have voted with their wallets, and that sort of bestows some sense of legitimacy. So NASDAQ certainly cares, and there are hundreds and hundreds of indices that we track. The question ultimately becomes, are there assets linked to those and and then, is there a need for derivative tools to manage and really customize that exposure? And in the cases of the NASDAQ 100 that is certainly the case, and it continues to grow.
Jeff Malec 14:20
Yeah, to me it’s more like, I don’t hear anyone talk about the NASDAQ composite. So like, I get it’s important over there, but, and I’m probably in a bubble and right, all the options, everything the futures we deal with, are all on the 100
Kevin Davitt 14:31
but so here, even I think about this often, and the comp does get it flows across chirons on financial TV. But when I was younger, or our parents would be talking about the Dow. And I think there is a time and a place for indices, and I think they reflect, to a certain extent, the zeitgeist, and that is my sort of longer term belief. The ascendancy here, and that is not the case. Now, I’m not I’m not on here saying the NASDAQ 100 is the benchmark. But when you watch the evening news or whatever, go through your Tiktok, scroll wherever the news comes from, it’s not highlighting the Dow, and that’s not likely to happen at any point in the near future. And there’s a reason for that, like, our tastes change, asset flows move, and we are in and change is constant, so we’ll see what shakes out in the future.
Jeff Malec 15:31
Weird, I was golfing a couple weeks ago with some guys, and the guy, like, looked at his phone. He’s like, Oh, the Dow is oh, probably. And we actually three of the gather guys were finance guys, and we started making fun of them. We’re like, are you needy? What do you mean? The Dow, who cares?
Kevin Davitt 15:45
He caught that on his AOL, messenger.
Nicholas Smith 15:49
Well, then to the point he probably has money in something linked to that, or some perception that that is going to affect his investments. And as those investments, you know, transition through the generations, if those are going to be folks my age and younger, that’s that same conversation. You know, I’d like to be at a point where we’re 50 years old on the golf course and being teased at NASDAQ 100 is, yeah, well, it was so popular 10 years ago. You know, that would be great.
Jeff Malec 16:14
But that leads to my another question a bit. Is it become so normal, right? It was the hot upstart, the tech. You’re going to get more return, more volatility, all these pieces. A lot of the options were traded because that, like, here’s where you go for some of these more complex option strategies which need the volatility. Does it become so mainstream that you lose that, that character of it? Or has it already? I haven’t, actually, I don’t know if you guys, and putting you on the spot, like, has the volatility come down over time, have the total returns come down over time? To me, I’m gonna
Nicholas Smith 16:47
give I’m gonna tee Kevin up for a 90s music point is a waste. Is any less full just because they were huge, you know? Like it. I think it’s totally okay to to be mainstream and still providing that, that special sauce. Kevin, what you think?
Kevin Davitt 17:01
Man, Nick, you got me with that analogy. I appreciate it. I think, I think I would start by going back to one of the points I made a couple of minutes ago about it’s a very different constituency. It’s a much more mature constituency. But I would also argue, given the makeup, given the construction, given that sort of index recipe where there are 100 constituents, not 500 or 2000 or the Wilshire 5000 or however many are in there, it will almost certainly, I always use hedge. Hedge language be more volatile at the index level than something with a broader basket of securities. Now putting some numbers around that, because a lot of your audience is probably quantity,
Jeff Malec 17:52
but a muni bond 100 and probably get less,
Kevin Davitt 17:56
sounds fun. Yeah, and too much advantaged. So over, over, like the past 25 years, that realized volatility, spread on an annual basis, is just over three vol points. Now, what’s interesting over the s, p, you’re saying correct, yep. So we’re talking like, on average, it tends to stay right there. No. That really good question that that ebbs and flows. It gets about as wide as eight vol points. And there have been sort of one, one and a half situations where nd X vol was slightly under SMPS. I’m going to put you on the spot here, Jeff, just if you had to take a guess when that might have been, what? What would you think? And it wasn’t for a very long time. So, like, I don’t think you’re gonna, you’re not gonna look silly.
Jeff Malec 18:54
Microsoft was added to the s, p, it was someone like that.
Kevin Davitt 19:00
Yeah. So I got, I got stories around, something like that too. The the answer as far as annualized vowel, is 2009 so I my, my thinking there is, like the X financials part matters. And when you think about that period, very much of the risk was centered around that area of the market. Now most certainly bled over, right? We’re certainly simplifying here, but the the sector that was most directly impacted was financials. Financials have lagged for decades on on like a relative basis, and they now make up a smaller part of the s, p5, 100 than they have in a really, really long time. You make the point about when something was added to one index or the other. I’m gonna turn it around on you again. Tesla, it was added to the NASDAQ 100 take a stab.
Jeff Malec 19:58
You. When was it Yeah, 2017
Kevin Davitt 20:05
2013 when was it added to the s, p5, 102,017, 2020 the very end. Now, a ton of market cap growth in Tesla was captured between 2013 and 2020 and you could pick out a number of of names, maybe not quite as as magnificent as that one to you to coin the today phrase, taking it back to our sort of bigger vol point, the spread post covid has been on average, five vowel points. Now that might be even bigger than you probably would have guessed, relative to that long term historical norm this year, year to date, annualized vowel and nd x is 25 and a half, and in the SMPS, it’s 20.7 so very much in that sort of five year average, the widest it got in recent memory was 2022 and if we think through that, the sell off in the market was very much concentrated On mega cap tech names, big, big household names went down 30, 40% some more, and it played out with higher vol. It is a feature, not a bug, and I think it drives a lot of the activity that we see in the derivative ecosystem that volatility and higher vol is the appeal. I could be wrong, but I feel pretty strongly about that.
Nicholas Smith 21:46
And both Kevin just backs the conversation you and I had Kevin in terms of like, directionality of vol and the market movement. I suppose it just springs to mind that, of course, you know when, when we look at assets, we’re looking at it through the lens of derivatives, which can be from a hedge scenario. A hedge scenario. Of course, when the the sort of the the underlying investors look at the assets, it comes more from the perspective of where, what’s going to make money. And then you talk in there about how, you know, if you were invested in the NASDAQ 100 through that period of 2013, 2020, you were making money in Tesla, which you weren’t on the s, p, I know it just just got me thinking about what all that means for for vol, which I suppose, inherently, you know, is not an up market metric, per se. So it’s an interesting time we’re living in, right?
Jeff Malec 22:35
Well, the technically it is, but we don’t think of it or quote it
Kevin Davitt 22:39
right, right? You nailed it that upside vol is a thing in our world, and it is a thing in the calculation of annualized volatility. You think back to the early April move, where markets ripped higher post. You know, we should be buying stock talk, and the Nasdaq 100 on that day was up, I believe 12 and a half percent. The s and Ps were up in the ballpark of nine, 8.7% something like that. That is a move, a closed over close move that stays with volatility measures for quite some time. And what we have seen over the better part of the past decade or two is that that upside vol, that the NASDAQ 100 is as reflective as upside vow as anything, but it does cut both ways, because, like I mentioned, 2022 that is the downside, but for passive assets, the ultimate sort of goal is performance, and so that by that measure, it’s going to be really hard to choose an index that has outperformed the NASDAQ over any significant time frame.
Jeff Malec 23:59
Do you think some of that is, uh, US based, too, US centric, right? Like it, if you zoomed out even further, us over Asia, US over Europe, has been dominant. So part of that story, to me, is not just the tech piece, but also the US piece of the NASDAQ, right? It’s got less global, probably than than s, p,
Kevin Davitt 24:19
fully agree with, sort of the the the articulation of of a Zeitgeist that that expands beyond just s and p NASDAQ, or Russell S and P, or Russell NASDAQ, that has played out since, Let’s say, 2006 right when, like the bricks, sort of countries were were ascendant, that could change. I’m like, you know, Jeff, kind of a fan of history, and it can be dangerous to think this is a new normal, the makeup of the NASDAQ one. 100, there are a handful of international constituents. I can’t just rattle them off, off the top of my head. And in terms of revenues, the proportion of index revenues that come from overseas, Nick, this is something you and I believe we’re talking about, is actually higher in the NASDAQ 100 then in the SMPS and 50% now, right over 50. Yeah, correct.
Jeff Malec 25:28
Is that weird? Because Apple’s routing it through an Irish subsidiary. It’s like things like that.
Kevin Davitt 25:35
Probably, yeah, they are doing that, you know, in in biotech as well, right? They’re not, they’re not the only ones, and being smart within the confines of the law with tax burden is just being smart business, right? I’m not, I’m not here to prosecute that.
Nicholas Smith 25:54
But as I was gonna say that, I suppose, when it comes to we talked about NASDAQ 100 being the index of picking winners. Essentially, to summarize your earlier point, Kevin, is that, I mean, the the export market is part of what has, you know, led American exceptionalism. You know, American exceptionalism in equities is not a vacuum story. And so to again, to go back to and granted, looking at it from a linear upside investment stance, even though derivatives provide a whole lot more exposure to that. Yeah, it kind of makes sense that that’s that’s how folks want to make money off the equities that are going to make money off the world. That makes sense.
Jeff Malec 26:37
Yeah, who owns the IP? Basically, I
Jeff Malec 26:45
two thoughts here. One, my personal investment philosophy is, as soon as they come up with an acronym for it, it’s time to sell, right? Bricks, all that stuff. AI as well. Ai, yeah, I don’t know. No, AI, is fine. That’s more of a what
Kevin Davitt 26:59
does that leave in your portfolio these days? If I have devil’s advocate,
Jeff Malec 27:07
something back in later, but right as soon as it becomes like, oh, bricks. Bricks was the perfect example.
Nicholas Smith 27:12
And then they’ve come up with the the the acronym that probably all the analysis has been done by the smarter guys who have more information behind you, rather than you know what you can do in your portfolio today, it’s a good it’s a good system.
Jeff Malec 27:27
And then a note, we’ve had guys on this podcast doing tail hedging that they actually will look to the NASDAQ options because they feel there’s a little hedge in there. If there’s a shoot up, that ball is not going to just erase like it will in the SP. They might get a little pop involved. It’s not going to be a big payout, but it might hold up value more than than you would think in a huge up market.
Kevin Davitt 27:50
Nick You should be, you should be talking to those types and yeah, have that.
Nicholas Smith 27:55
Yeah, definitely. I mean, yeah, we agree. That’s what we do, I suppose, from from a tail risk perspective, I would like to think of this, because now we are getting into, like, managing that, managing that volatility, essentially, not just, you know what, what do we like in the index? And why do people like this in the index? A little more derivatives focused, and then specifically, index options focused. I mean, for me, coming at index options, you know, I joined NASDAQ 18 months ago, from your ex, which is a whole farmyard of different derivative classes and types and cross fixed income futures, options, repo, the like, and diving into a single product that NASDAQ offers has been a fun endeavor. And for me, just to explain kind of where I’m going. Here is that index options provide this very specific opportunity insofar as the asymmetric investments one. But then I was saying to Kevin that I find the paradox quite interesting, how the proliferation of the the in the specificity of the experts, has occurred in this, this, this machine that inherently is kind of broad based. So you look at, what risk Am I exposing myself to? And this is what I find fascinating, is that in in index options, you’re looking at, okay, we have this discussion. We might be on an investment committee, talking about, what put option are we going to buy? Let’s just boil it down to a simple scenario, and we have that discussion about, okay, well, where’s our investment, what are we looking to hedge but then I think what is most fascinating to me is just how these broader indices we’re talking about different time periods. So then to be able to segment and slice up is not, not something that you tend to do in the futures world. So much. Those tend to be role positions, you know, for, for specific management of specific, you know, deliveries. This is more about, you know, okay, What? What? What am I hedging against? And that is what attracts NASDAQ. 100 was attracting NASDAQ. 100 Just for me, is that these tail risk scenarios, we often look back at, what were the tail risks, you know. And we talked about financial, you know, financial crisis 1008 Okay, that’s a big one. And of course, you know, although a financial crisis would have a have an impact, a big impact, surely, on the NASDAQ 100 you know, we can dive into, for example, the differences in the average debt debt ratios in the NASDAQ 100 tends to be higher, for example, than s and p5 100. But by Dubai, the financial names are not included in the NASDAQ 100 so then we start to look okay, what are the contemporary tail risk scenarios like deep seat day is the scenario that we’re hedging against, truly, a question of, you know, whether the the 400th to 500th constituent of the s, p, maybe, sort of old school industrials are going to go down 10% or is it that NVIDIA, you know, has has a particularly bad day, and if, if Nvidia is making up such a large portion of my portfolio, that’s something to consider.
Jeff Malec 31:02
Yeah, I’m 100% we run across these investor types all the time of like, Oh, I’m trying to hedge my portfolio. I’m looking at this S and P tail risk. And what’s your portfolio look like, Brian, it’s basically the NASDAQ 100 it’s Nvidia, it’s AI, it’s apple, all these things that have increased greatly in value. So, yeah. And then there’s still the point you’re making, right? Like, Hey, make sure your protection matches your exposure. The one
Kevin Davitt 31:30
other point I would make, and it’s getting a little bit wonky, but I think most people would follow, is that in the derivative markets, the supply, the natural supply, demand dynamic is always going to matter, and by and large, most tail risk strategies are expressed to this day in the s, p5, 100. And you could make an argument that the tail volatility so there could be any number of options that fall into that category, but let’s say, like a 10 delta or less option with six months until maturity or more right wing options, that the demand for those as a function of vol re, vol control, tail risk strategies pushes up that sort of relative value of the S and P put, and you don’t see the same natural demand to date in the NASDAQ 100 and so we have looked at some of the data going back historically and on a relative you could make a relative value argument that if we have that, that event, that catalyst that drives the S and P, is down. I’m just picking a number, 20% the NASDAQ 100 would likely be down. 25% something in that neighborhood, and that the vol performance of the what would then be the at the money options in both would be more responsive in nd x. So I think that’s, it’s a longer winded story, but I think we will, through time, see flows of the tail risk management variety that are increasingly expressed on a relative value appeal in nd x we have seen, sorry, I’ll leave it at this, but the proliferation of insurance firms looking for lit markets in long dated nd X maturities, and that is because they are seeing demand from I Want my reference asset to be the NASDAQ 100 and I want some parameters around that exposure. The lit market is then informing the OTC market. And you see that risk recycled back into OCC cleared products like we like we support.
Jeff Malec 33:56
Can you explain the lit market for my friend?
Kevin Davitt 33:59
Sure. Yeah. So anything that you could pull up on your trading front end has a lit a lit up a visible bid and
Jeff Malec 34:10
ask, right? So it’s all around business and finding a mark, yeah. And then
Kevin Davitt 34:14
there’s the OTC or dark pools in the equities world, and that is an opaque market. And beyond that, it’s not centrally cleared in the knock on wood unfortunate scenario that something like that becomes a concern, and so the liquidity providers are lighting up a value based around some theoretical value for the rest of the world to see. And I think that a great deal of OTC risk is at least using that as some indicative pricing to manage these longer dated exposures and the risk around it,
Nicholas Smith 34:55
any millennial and Gen Z listeners, the market is also lit. It’s a fun. Place to hang out.
Jeff Malec 35:02
Yeah, exactly, the lit market. Man, that’s some Miami lingo. You got one? Do you? Is part of it? I don’t know the numbers here, but it’s probably more expensive, the nd X option tails right to purchase like, so they’re going to be more expensive. Which people just it’s like a cheap hedge, like, I’ll sacrifice some of the I’ll take on some basis risk to save a little money paying this annual expense on the tail
Kevin Davitt 35:30
edge. Nick, do you want to
Nicholas Smith 35:32
take that one? Or you want to, yeah, I mean, essentially, that’s not inaccurate. There’s going to be costs associated with that. Ultimately, it’s the cost per volatility exposure that you’re getting in that and of course, that is higher for a higher volatility index. Suppose that speaks to Jeff, the other use case of and Kevin alluded to insurance companies that offer annuities, various structured products go around this where there are income strategies, and that will be kind of the counterpoint to what we just been talking about in terms of the validity of these tail risk hedges, you know, not even counterpoint, but just the other side of the coin is that you know, if there are, if, if you’re looking to generate income from the index options market in selling these options, then there are possibilities in the in the nd X, Kevin, right?
Jeff Malec 36:16
If they’re too expensive, sell them instead of buying
Kevin Davitt 36:20
so when, when you make an expensive or cheap argument, it is relative to something else, either itself, historically or some other asset. And the one thing that I would point out as certainly an appealing element of a notionally sized product like we are we are supporting, is that the with, with one put option, for example, you are theoretically offsetting the full value of the index, which, right now, we’re talking about a 2.6 million. So the ratio, my point here, is that the ratio of nd X over SPX continues to widen. And so with fewer contracts, a hedge fund or an insurance firm can offset the same notional exposure using ND x as opposed to SPX. And so if you notionally equate the premium dollars, they’re probably very much more similar than we’re sort of alluding to right now. In pure premium terms, nd X is a rich contract to trade, and you need to have your big boy pants on. That is why we see predominantly spread trading going on, because outright exposure is is very, very costly.
Jeff Malec 37:42
And I’m, I’m blaming some naive people who just see, oh, it’s I can. I have to spend less over here, like I’m gonna ignore all the upsides and all the notion I’m gonna ignore everything else. And it’s just, I have to spend $500 versus $1,000 I’m gonna spend 500
Kevin Davitt 37:57
what that’s that’s how consumers work, right, exactly, all over the place.
Jeff Malec 38:09
So we bounced around. We’ve touched on flows a little bit a couple of times. So a few things, no particular order, I’ll throw on my lap there, and you guys can tackle them as you see fit as you as you mentioned, all these buffered notes, structured products, all of that flow coming through into the listed option space,
Kevin Davitt 38:28
the proliferation of covered call strategies, which are somewhat related, but a little bit different in my mind, and then the zero, D, T, E stuff. So who wants to jump on which grenade first? And kind of talk about what you’re seeing there and and is that as big as I’ve seen reported, and is it growing substantially? I’ll start and then flip to Nick. But those are not grenades. Those are, those are growth volley pops, yeah. I mean they they are boxes that just keep getting bigger. Now, from the seat that you’re in, you want the business where, where those flows are, then ultimately wrapped within the ETF structure and offered out and available, but behind the scenes, what’s going into that box, and this, too, sort of going back to the how consumers behave is exactly what the market needed. In my mind, so many people don’t want to manage the nuance of I’m comfortable with long outright index exposure and Sure. I would love protection against the first downs, the first 10% in downside, or I would love to potentially participate in some of the upside. Now we’re talking about covered, call, structured, sort of overriding, and I will give up some beyond a point, right? But they don’t want to go into their XYZ account, manage that, roll it. Deal. The tax implications. They want a simple wrapper, and this made all of that available, and the market has voted with their wallet and put hundreds of billions of dollars into these wrappers over the past handful of years. My belief is that it is still very much early stages, and that is pred, or that belief is sort of pinned to the huge number of assets that are traded in structured products. You are seeing all the sort of flavors that are available in the structured product world, come to the ETF wrapped world. And it is a good thing, I believe, for the market. Now, that said, that doesn’t mean that every wrapped product is a good one, because I think you’re seeing some sort of that leverage is typically at the epicenter of things that unwind in an ugly way. And if you don’t appreciate how much leverage you are assuming in a given position, that that can work out very poorly, but for the judicious, really well informed investor to be able to get that exposure in a tax efficient wrapper and not worry about all of the nuance, I think it is a very, very good thing for the market. I think that incentives have been aligned. And When Nick is out talking to hedge funds and stuff, I imagine they find it a little bit more difficult to to position their sort of value prop given the proliferation of sophisticated product available in in a very simple wrapper now,
Nicholas Smith 41:47
yeah, I fully agree on all that. I would I would say that hedge funds are still doing what they do for who they do it and doing it well there’s I would say that you also have to think about it from the lens of an example that sprung to mind, Kevin, when we were talking there was, I’m on the board of a food pantry here in Coconut Grove in Miami, and we have a small endowment. And you have to think about it from the lens of when you might have sort of a lot of endowments have fully staffed investment committees of finance professionals, a lot of endowments don’t. And in aggregate, those, those, those smaller groups, you know, we have to go through that education process with, with, with the board to understand, you know, what are we investing in? And I think the advantage of buffer notes in particular is that is that it strikes the balance between easy enough to understand and invest in without being excessively complex and creating what would be perceived as risks to a group who maybe are looking at a the funding of a food pantry over a period of time. So we don’t want to be in that that, you know, very tail risk scenario. But we also do want to participate in the upside, because we want to still feed people 10 years from now. And so that that becomes a an investment that makes sense, you know, and historically, would have probably been fulfilled by some combination of blue chips, blue chip stocks with with dividends, and so it really isn’t, isn’t a new model. It’s just a new way of folks accessing that in a way that I think makes, makes, makes a ton of sense, and certainly we do as an endowment so
Jeff Malec 43:33
and now the bakery selling these donuts. So you might not have a but to me, it’s like become so popular, my cynical brains, like something’s gonna break right? Something is getting too big. What’s the when the other foot falls? What’s it gonna look like? And then I realized, well, if you just bunch of call selling, it’s just gonna look like a bunch of people only making 20% when they should have made 40% or something like that, which maybe after enough years, people start to say, Hey, this is stupid. I’m right. I’d rather have, maybe not,
Nicholas Smith 44:04
but, but, sorry, I remember the rest of my point making the Kevin on the, you know, hedge funds, you know, as you have these, these instruments that Jeff talks about, that you know, that are providing certain returns that may or may not be suitable in a given in a given moment, I see that as like building blocks to the pyramid of you have, you know, more sophisticated investments up top for more sophisticated needs, and the proliferation of of bank q s desks that provide those sophisticated strategies for large institutional clients, not not the coconut growth Crisis food pantry endowment, but instead a large pension fund. I don’t think that those are unrelated. I think that that step up in sophistication is actually combined, because those guys are on those endowment boards as well, and as everyone gets more more involved, it actually just brings it all up to your point, Jeff, what is the what is the tail risk of these? Have these, you know, terrorist protection strategies. And I think that that, you know, we would, we would just see a reset of how folks would want to invest. But the same has been true of like, you know, you look, when do you dip your toe in crypto? Yeah, when you see those investments going up a certain amount, and when’s the moment for that? So for me and my love of derivatives as a market is that it just provides all these options. Forgive the pun, for investors and and the increasing amount to which those are being made available across the board, it’s just a wonderful thing.
Kevin Davitt 45:34
Well, Jeff, you, you made a point that I think people that have been in around the market through a variety of crises are want to make, and I’m very much the same way. And then you answered it with, well, like in the example of the covered call, we’re talking about strategies that have a beta of like point six, five to point seven. Now contrast that with something like the implosion of levered volatility exposure, where it’s 2x Yeah, please exposure, right or, and I’m not, I’m not trying to pick on any specific name, but like a 3x micro strategy, and these are not things that are designed to be held long term. But do end users understand that when perf, when a performance chart looked like short vowel through 2017 it did exceptionally well until it didn’t? And understanding that what’s going into my wrapper is crucially important. The one other thing that you teed up a couple of minutes ago that we didn’t address, which is another sort of market structure question to a certain degree, is the the the the real appeal, the volume generated by expiring options, by short, dated options these days. And that’s one where I think even the most optimistic of exchange veterans probably would say, Wow, this has, this has grown beyond what I had anticipated.
Jeff Malec 47:20
For one other reason, of like, we’ve always had options expiring today. Like, what’s, what’s the big deal? Like, we’ve always had options that have zero days till expiration, but now they’re every day. So, yeah, yeah.
Kevin Davitt 47:32
But the I keep going back to the sort of consumer markets across the board, and people value customization or precision. You think about, like, shoes. When we grew up, there were like, there’s just, like, a handful of shoes that were available, and now you can legit design your own and have them delivered in like, a week. It’s amazing. The other thing I think about, and I’m going to bring it to sports right now, is your son playing golf. My son, I’ll go to a baseball game later today. He arguably, like some people could argue, they spend too much time on the range, playing golf, playing baseball, it’s repetitions. And I would say if you are able, as a newer derivative user, to get those reps in and to get regular feedback from these short, dated options where premiums are smaller, where theoretically your risk is smaller, it depends on the strategy. Big time caveat, but you’re getting feedback from the market, what’s working, what’s not. That’s sort of like practice, practice, practice. And if you’re only able to play one game, I’m making it too simple here. A month, you’re gonna get better through time. But if you’re able to play 20 or 21 typical trading days in a month. You you can probably fine tune a strategy much more quickly. And maybe I’m oversimplifying there, but I think that increasingly market participants are seeing value in that, that that ability, that combination of precision, sort of customization and regular market
Jeff Malec 49:20
feedback, and guys on pod talking about the mathematics of it even ignore learning. Just if I believe I have this minuscule edge, I want to run it back as many times as possible, right? So the mathematics support that
Kevin Davitt 49:34
when the other thing about like reducing your path dependency, right? If you had a big move on the third week of the month back in 2005 your passive strategy would be really impacted with something that you’re able to do either weekly or daily. Your Path dependency changes significantly.
49:57
And it’s kind of cool
Nicholas Smith 49:58
in the zero. IT world. We created this. I mean, we count the contracts as an exchange like, that’s how we make money, as exchange fees, right for the contract. So we don’t always, you know, on a balance sheet, far from loss. We don’t differentiate. But of course, the the nature of those instruments is so wildly different, whether it’s expiring, you know, in 10 minutes, or whether it’s expiring in 10 months. And so I think that the you know, you could logically, and many research departments do isolate those expiry flows into, you know, specific analyzes of, okay, what’s being done. And it’s a completely different marketing, completely different marketing, complete set, different set of people doing completely different set of things with a completely different set of things. Even though the tick is the same on Bloomberg, the Greeks can be completely different. The speed of move is completely different. You know that all of those things are so, so different. But I think it’s just speaks to the beauty of derivatives again, you know that’s, that’s the specificity of exposure. Not only can we provide you that over, over a period of time, but also, you know, five minutes from
Jeff Malec 51:08
now, in my brain, these for profit exchanges are just going to keep going down that rabbit hole, right of like, hey, let’s do half day options. Let’s do hourly options. Let’s do right like, why not just keep getting shorter and shorter time frame at some point there’s going to be right what’s ask you guys, what’s the practical limit of the innovation there from the exchanges side?
Kevin Davitt 51:30
The thing I would say, and I am not privy to any plans like that, I understand your point from like an MBA analysis of what drives the bottom line. And just to be clear, that would probably be good for a group like yours, like more things on the menu right where we benefit. I don’t think that’s exclusively how exchanges look at it, because we are sitting between a variety of different players with different motivations. Beyond that, there are technical concerns. So if you think about liquidity providers and the amount of quoting that goes on, given the number of strikes and products we have right now, it is pretty remarkable how efficiently our markets operate. Think there’s something like on an average day in NASDAQ options exchanges, 100 billion messages, that’s beyond what I can comprehend, because I’m I’ve not been in that. I’m printing out right?
Jeff Malec 52:38
Kevin so and no, Blockchain was needed. Remember when blockchain was going to solve that? And anything that had that many we can just do it.
Nicholas Smith 52:49
We’re good from can? I’ll speak Kevin, unless you want to finish up the from a transatlantic lens. I think I’ve become increasingly cognizant, and I had this, this debate with colleague mine from Sweden. Hey, cock, and if you’re listening, and you know, he was saying that, well, the 100 decimal, decimalization of everything is the way forward. And we should, we should decimalize time, you know, like very, very strain on this. Had his logic. And I guess I’m only sorry he’s not here to defend himself, but I but my point is that there are suitable measurements for everything, and it comes down to actually, in the end, biology, you know, like, ultimately, a day makes sense, because it’s light outside for a period of time, and then it’s dark outside for a period of time. 24 hour period is a logical period, and that’s the sun, similar story, you know, like when it comes to American and European measurements, European favors the logical, you know, it says, Okay, on one you have one gram and you have 100 grams down, you know, so forth. And was it 1000 was it 100 milliliters? 1000? 1000 milliliters is a liter, and then a liter is a kilogram. Yada yada, right?
Jeff Malec 54:04
American in the neighbors, skit, yeah,
Nicholas Smith 54:10
but the but the but the American favors the practical. And you open it, you open a recipe book in Europe, and it has grams, 100 grams. Now that that works if you’re going to the supermarket to buy something in 100 gram number, but American says cups. Well, everyone can just buy a cup, and then we all know cups. And then cups is it’s slightly less accurate, but from a practical lens, it actually makes tons of sense. And the one that I’ve always found funny, and to this day find amusing, is that when I came to America, I realized that the gallon price, which, by the way, a gallon is a logical amount. It’s like this much, right? Again, back to the point that’s an ounce, you know, so forth, but, but the gallon on the price of the gallon on the on the pump was how many miles I drove per gallon. Gallon in England, we’re weird. And we have, you know, miles per gallon is our fuel economy by our gas by the liter. So I always had to do the math. And then I came to America, I was, oh, 25 How about it? That’s how many miles. So anyway, where I’m going with all this is just that there is a practical limitation to a lot of things, and it’s organic, and America happens to be at the forefront of that it relates to measurements. And we said, No, we don’t. And we said, No, we don’t want to do metric but, but for this purpose, you know, there every second wouldn’t make sense. We can’t do things in a second. So there is this logical
Jeff Malec 55:36
of those traders who’s like, is anyone demanding that they get shorter and shorter,
Nicholas Smith 55:42
but I’m sure some, I’m sure someone is but again, it comes down to, like, how practical is it for most people? And to Kevin’s point, how practical is it for the market makers in question? And I, I just enjoyed that as a as a conversation.
Jeff Malec 55:55
So in England, you still have miles per gallon for your car, but it’s liters.
Nicholas Smith 55:59
So yeah, yeah. Yeah, we yeah, we sort of awkwardly straddle without but it’s
Jeff Malec 56:04
so expensive anyway. Like, why even do the math? Just yeah? This is too expensive. Take the train.
Jeff Malec 56:14
Couple more things. AI generally, what is NASDAQ doing? Anything inside of the exchange with derivatives, with AI to like you were talking about, to transact those billions of transactions, or whatever. And then, more generally, just, what are your guys thoughts we talked about? What are those tail risks like, if there’s another deep fake or AI kills somebody, or who knows what’s gonna happen, right? Is that the next tail event of some right or some couple fortune 500 companies go, this isn’t working for us. We’re pulling back on all our AI spending. So maybe we’ll start with the second one.
Nicholas Smith 56:50
No, let Kevin think about the second one while I asked the first one. So NASDAQ, of course, as a as a exchange, but also Fintech is implementing AI and AI in coming this from a derivative lens. I’m sure you’ve had, you know, guys who operate CTAs do machine learning like aI from a training lens isn’t necessarily a new thing. It’s just the speed at which things can be changed and re changed and done and all that jazz. But machine learning is essentially been there, and it’s kind of the nature of software. I suppose, when I think about software as a service, I’m thinking about like functions that we can get computers to do that historically, humans did. I wish I had it with me. I got a book, Fantastic book, after the trade, is made David Weiss, and it’s written, I think, late 90s, and it shows all the securities processing functions that happened, and these used to be rooms of people, and it has these wonderful diagrams we can see all that. And it’s fun. It’s fantastic to read as someone who’s kind of new to the industry, because, or you were like, you know, from joined since the advent of computers. Should we say? Because a lot of those functions still exist, but they’re done by computers. And the reason that they’re done by computer in a certain way is because a human used to do them. So anyway, I just think it’s interesting when you look at software and the way that that’s gone, specifically when it comes to teaching software to teach itself, which is how I conceive that that that notion NASDAQ from a exchange perspective, we have to choose what strikes to list. So when it comes to nd x, we have all the strikes when you go on your option chain, and you can see the different strike points that you can pick for the strike on your options contract, as well as the expiry, the strike and the expiry and the column the put the buy and sell. Give you your sort of definition of the contract. So we don’t have strikes from zero to 10 million. That would be too many messages to Kevin’s earlier point. So we have, we’ve implemented an AI system by which we can sort of align the supply and demand and the likely supply and demand of those strikes, so that we’re being efficient as a provider of this infrastructure and keeping our service cool, essentially, so that, so that when there is a, you know, a specific interest in a specific strike, not only is that strike listed, but also then we’re ready to, ready to do it. We’re not wasting money on, at least in service space, on the on the stuff that isn’t being being used.
Jeff Malec 59:19
I need to call when I’m like, where is this strike on core? We, I don’t why isn’t it here?
Nicholas Smith 59:24
Yes, and certainly, you know there are, there are requests. You know, Kevin talked earlier about, like, insurance issuers asking for not, not necessarily strikes, but expliciting at a further, further place. But yes, indeed, if anyone’s looking for strikes, feel free to get in touch. But for the time being, we have a system that deploys AI to facilitate much of that. And then, of course, NASDAQ, more broadly as a sort of FinTech organization. You know, we’ve made, made acquisitions of Denzer, verifin, other fintechs that deploy AI in this in their solutions that. Not so much Kevin in my space, but big part of the NASDAQ corporate strategy.
Jeff Malec 1:00:04
A lot of early AI, in terms of markets, was used for the like compliance too, like no market manipulation and fat finger stuff and all that
Nicholas Smith 1:00:12
stuff, right? Rightfully so. Yeah, yeah. Exactly. Picking up on Mona and your second question was around, you know, what what does the next stage of AI look like? And or could that be a challenging scenario? Should we say? Kevin, I wonder if one model is there good,
Jeff Malec 1:00:30
I’ll throw one more piece to that. Is my theory is we’re going to AI ourselves into a huge recession, because we’re going to take away all the consumers, right? Like this whole two buildings of people that had to create the that market structure you’re talking about now does not have a job, or they have different jobs.
Nicholas Smith 1:00:47
Well, this isn’t our first Industrial Revolution, right? That would be my first like thought to that is the, you know, sure, those, those factory jobs. And I suppose you could even think about it in terms of NASDAQ 100 as the index of the factories at the time of predominantly agricultural development, to me that that was not a inherently bad, you know, situation for most people. People re skill every tool. There are jobs for people, they may look different to what they were before. I suppose, to me, the main advantage of AI is that I think retooling is, can you can never argue, I don’t think you’d argue that retooling has been ever faster. You know, we you can take someone and retrain them in something different, if they have the skills to use AI in, in their in their new line of work, I suppose, is kind of where my head goes to, and then fundamentally, you know, the same number of restaurant staff, you know. I mean, where are we going to take this? You know, ultimately people. I suppose this comes back to the practical limitations of the economy that we talked about in terms of, like, how many, how short should our expirations be? I would say that ultimately, this whole wave of technology is still in the advancement of human beings, and we need places to live and cars to drive and places to spend money and food to eat, and all of that, which is an economy in and of itself, which can be sped up by AI. But you know, it’s going to be a while before that is a wholesale replacement, and we never have any. I mean, the scenario, I suppose we’re talking about is having no interactions with humans ever. That’s not what we want. So it’s not going to happen.
Kevin Davitt 1:02:32
Kevin, you you guys went very sort of philosophical. And I think I’m sort of of two minds on that one as well. The only thing I don’t think you brought up is that, like industrial revolution, that needed at some point in, you know, in the process, a push back. And so there I’m thinking about things like labor rights. And so the regulation that exists in US markets is one of the reasons I think it has become the epicenter of financial markets generally, there is trust and so so long as we are able to advance this artificial intelligence effort and people continue to trust the output, then we’re doing well, and It’s going to require some type of governance to keep it on the on the rails. Jeff, your sort of original point of the what if we can’t monetize this? Think it’s a very real risk, because there’s not been we don’t have a long enough track record to say, here’s how you manage through a crisis, and ultimately, our economy is still dependent on my spending, Nick’s spending, your spending, and so the cannibalization of jobs, right? It’s easy to tell some dude from 1842 he needs to retool. It’s a lot more difficult when you and I have to do it. And so those are legitimate concerns. I don’t know where they go, but the Can we monetize it? I think, is a real linchpin. I wish I could answer. I can’t, but if there’s a tail risk event, I think you might see more responsivity in nd X options compared to other alternatives.
Jeff Malec 1:04:47
And look at them, put the bow on it, and related somewhat. And I guess your thoughts has the net, are we more top heavy now than we ever have been? Has that always been a feature of net? Tech 100 is it become? Is s, p, trying to catch up and getting more top heavy to look like the NASDAQ 100 sorry, three questions in one there, are you worried about the top heaviness, and is it all that different than historically? Is the main question.
Kevin Davitt 1:05:18
Last thing first, historically, I would say that a market cap weighted index, unlike the Dow, inherently favors some sort of top heavy makeup that we vote with our wallets and the big ones make up a bigger portion. It has worked relative to history, it is not that different than any other time. We’re talking about degrees of like, is it 22% in the top 10? And now I am talking about the s and p5 100 versus 29% and is there a tipping point? Ultimately, it is very typical for a handful of securities to really pull along the rest of the market. And the same thing happens on the downside. They can they can brand down that those securities have had a greater concentration or exposure in the NASDAQ 100 over the past handful of years, and that has led to outperformance. Now, if you look, because we talked a bit about global markets, our concentration is is, uh, much smaller than what you see in the likes of Nick’s FTSE 100 or the DAX, where just a handful of companies securities dominate the market. And it still works, but like the market cap of Nvidia is still bigger than the entire FTSE 100 market cap, or like the DAX, our approach is working. Are there risks? Most certainly. Can they be managed? I would argue yes. But I think big picture that markets are bought and sold, and we like to lean into the greed side, and we like to sell the fear side. And I think mostly the concentration stuff is written with that fear motivation. I’m not scared.
Nicholas Smith 1:07:28
Can I add that? Like everything’s always top heavy. That’s the you know, world. Well, Walmart makes more money on one thing than another. So if you have an index of of companies that look exactly the same and perform exactly the same, it’s still top heavy, just in a different way. It’s top heavy within those equities. So it just happens that this is a top heaviness expressed separate with an outperformance to Kevin’s point of supply and demand. And then, you know, demand in that particular equity. It just happens that NASDAQ, as a as an exchange, has the has the equity listed that people want, and the price reflects that, you know, that could also be that people want a portion of a specific stock and not another. So I suppose, yeah, top heavy at what level? I know your question is quite, quite clear in nature, but I would argue that there’s always going to be winners and losers, even if that’s, you know, possibly internationally, possibly even in a microcosm of particular
Kevin Davitt 1:08:22
equity, and the losers get cut at the end of the year, the losers get cut.
Jeff Malec 1:08:30
And that’s formulaic, or there’s a committee
Kevin Davitt 1:08:33
formulaic in the NASDAQ 100 which, again, I would, I would argue people prefer, as opposed to some of the choice embedded in the s and p5 100.
Jeff Malec 1:08:46
I was just remembering, as you were saying something I think two years ago in the NASDAQ, where the dispersion trade was kind of upside down, the actual single names were having less volatility than the index itself. Am I mistaken that? Or that happens from time to time?
Kevin Davitt 1:09:02
Well, you bring up a very interesting point, particularly right now, where something Nick and I were talking about over the weekend realized correlations within both of the major indices we’ve talked about so far are at historic lows. That means that idiosyncratic risk is what we’re seeing stocks you’re getting in the past handful of weeks, a legal ruling where Google and Apple were pleased and had big days and you see these single names that are making big moves, but at the index level, by nature of how indexes are, it’s balanced out, and we’re seeing exceptionally low realized volatility, the dispersion trade has grown alongside, you know, like the wrapped product we were talking. About yesterday. That is something where, I believe in time you will increasingly see the index vol component of a vanilla dispersion trade whereby somebody has long volatility in the constituents short at the index level. I think you are going to increasingly see that expressed in the NASDAQ 100 I think the concentration. And there are so many ways you can carve up dispersion. I’m talking vanilla, yeah. But like the you typically do it with some subset of the constituencies. And you could Vega weight or or whatever Greek weight you prefer, arguably easier with the NASDAQ recipe. And then, well, 100 stocks versus 500 or if you want to do it, and then the 500 they’re typically doing 50, maybe of the constituents. So you’re talking about a 10th. And it has worked. We are. I’m in Evanston, as I mentioned, and I’ve become friendly with some professors at Kellogg at part of Northwestern and they are doing some research specific to nd x as a dispersion expression. And we’ll, we’ll have something to talk about there next year, if you promise to have us back.
Jeff Malec 1:11:16
Done my, my theory is the other side of it, these companies which the proof totally proves me wrong, but my theory now proven wrong, is they’ve become so big they’re like countries in and of itself. You said it’s bigger than the FTSE, that you’d think their volatility would come way down, and they would operate with all these different revenue lines. But no, they have one big revenue line. Apple, it still blows my mind. A trillion dollar company can add 5% in market cap after earnings. Like, wait, what? How do people not know that?
1:11:54
Guys got any last good
Kevin Davitt 1:11:55
thoughts? I think what’s interesting is where Nick is headed and how globally interesting our index is is becoming. So as far as I’m concerned, I write regularly stuff where, like I gave you a flavor with the with the evolution, where I try to make these markets that can be a little esoteric more approachable, and if, if you’re interested in that, sign up for it. We regularly do public facing things like this, but Nick gets out and talks to institutional end users, and they are clamoring for time with him, kind of globally, and God bless him for the number of flights he’s going to be out in the next few weeks.
Nicholas Smith 1:12:42
Where the low
Jeff Malec 1:12:43
tech schedule, Yeah, where’s the most interesting growth spot there, right? We’d assume, like Hong Kong and London financial.
Nicholas Smith 1:12:53
Oh, yeah, naturally, financial senses, London is a is a huge second mark secondary market for us, as it relates to, you know, New York, of course, being where we see the most action from an institutional lens. But, you know, it gets spread out in the US, and then it gets spread out globally. I think the the brand NASDAQ has globally and that recognize record recognizability, there’s a better word somewhere anyway, that that provides, you know, a lot of interest into when it comes to more sophisticated investments around us, equities. I think the the script we talked about earlier, where NASDAQ 100 is becoming dominant, is kind of already, you know, playing out in other corners of the world. You know, we get talked about when it comes to US equities, and that that’s the nature of all the things we talked about in terms of our constituents and the liquidity available in a cash settled index option like the NASDAQ 100 and the strategies you can do off the back of that is definitely attractive to the global audience. So to complete the picture, I’m headed up to New York next I’ll be there for a little golf tournament. I don’t think I made the team, though. Ryder, Captain, yeah, I thought I was Yeah. Thought I was assuming. But okay, yeah, never mind. We’ll figure that one out. Now I’m on then then the global. Volatility summit in New York. Then I’m on to England, spend time family, and then I’m actually playing the second ever Ryder Cup venue, which, how’s your trivia? It was the first ever Ryder Cup venue, Kevin st, Andrews Worcester Country Club in Massachusetts. And then the second ever writer cup venue was more town in Leeds. So I’m from a similar part of the world to Alistair McKenzie. And if you were building a golf course in the 1920s in the in the in the in the Leeds area, there was one golf course designer that you call which was out which. It. So I’m playing that one. Then I’m on to Taiwan speaking at the Taiwan futures exchange conference, and then Hong Kong free QD out to Korea, and then I’ll be back for a quick respite for some more travel. But, yeah, it’s a fun little time. I’m taking my golf clubs with me. That’s the important thing.
Jeff Malec 1:15:17
Love it. But, and I was hazing you guys before we got started off camera of like, you got somewhat of the easiest job there, like, who doesn’t know NASDAQ, who doesn’t know NASDAQ 100 and think they need the options. Why? And there’s tons of people, but Right, am I okay? You tell me, am I in the bubble? Am I just confused? Or is it so well known?
Kevin Davitt 1:15:37
You’re not, but we are not thought of in the index options world, you brought the point up about commercials and the queues. And I think there is an opportunity to wrestle back some of that sort of brand cache, to take it in house, not wrestle it back their their distribution channel is hugely meaningful. But NASDAQ is becoming a significant player in the index options business. I don’t think the corporate has been thought of that way. Historically, it has been ceded to Chicago names, and I think that competition in that area of the market is good for anyone involved. And so that is as much the message as anything. This product exists. You can manage derivative risk in a cash, settled European product. You could certainly do it if you’re willing to trade 41 times the number of contracts in the queues and and the growth that we’ve seen over the past couple of years is a testament to at least some part of that story resonating
Nicholas Smith 1:16:47
worth knowing to that point. Jeff, exactly that. You know, I do go out and indeed, while the conversations are, yeah, cool, it’s on my Bloomberg terminal. But ultimately, what it comes down to is exchanges tend to have some unique insight, you know, product roadmap or development, something that we’re tracking, and that that engagement with end users of the product is really what, what drives the family of users, as it would back in the day, you know, like providing coffee in an old school exchange. My My great grandfather was secretary of the Bristol Stock Exchange, so responsible for many of the same things at a regional exchange back in England. But I digress. Point being is that there’s analysis that we share on liquidity trends, flow trends, market data that we sell on open, closed positions. And so connecting the dots for institutional users, there is really what I do, and the tipping point is just that. I think a lot of folks came out of the pandemic looking for what’s the new norm? What does it look like? Well, where are we at now, you know, all that sort of stuff. And since three years ago, our volumes have double, tripled, and our spreads of halved, and so in index options, in NASDAQ, 100 index options. And making in that liquidity becoming a sort of tenable mooring, as it were, is really the story of the last 18 months, two years since I joined and that that availability of of the product in a liquid format, you know, being able to trade in and out a bit in an economical way is really what has changed, and that’s the message that I get out to folks like Kevin has content. I also have a weekly distribution email. I call my NASDAQ nugget. If anyone would like to get on the nugget, we tend to share a little something that we’ve seen about, you know, just a volatility, you know, something that we that we’ve spotted, and we tend to share a bit of just a one minute read on that. So I
Jeff Malec 1:18:43
want, I want some nuggets. I’m partly guilty. So now, after this, you guys have won me over because I’ve put together decks and help managers perform. Like, why the S P, right? Why? Why hedge with the S P? And the answer is always in the deck of like, well, that’s where the world goes to hedge or something, right? It’s like, just the de facto where you go, but changing kind of a weak behavior, but that’s kind of a weak answer, right? Of like, oh, just because everyone else is doing it, but yeah. And then it’s a tipping point, right? Like, if everyone’s doing that, it’s hard to get a foothold, but once you get a foothold, now there’s real conversation. Like, Well, okay, yeah, it does make sense. That’s my exposure, like we talked about
Kevin Davitt 1:19:20
earlier. So you’re on me over. Good work. Wonderful one well at the time, one down.
Jeff Malec 1:19:30
Awesome guys, we’ll leave it there. Thank you. Good luck to your son and his baseball game this afternoon. Kevin Nick, I hope your team loses at the Ryder Cup. Well, who you’re cheering for?
Nicholas Smith 1:19:43
Now, I will be cheering for Team Europe, but that’s because I’m a West prom fan and an England fan, so I’m
Jeff Malec 1:19:50
a full get on and be getting hazed by all the rowdy New Yorkers. I’ll be quiet. One of the coolest things I ever see. And I was at a butler. Was it out here with the last Ryder car, or forgo whatever that was, Medina?
Nicholas Smith 1:20:07
We’re really talking about Medina. Okay, Europe one, yeah.
Jeff Malec 1:20:10
Okay, sure. And I was on, like, the 15th hole, I think it’s par five up by the green Rory hit his second three. Wood bombed it into the green side bunker, and he comes walking up. We’re standing there all excited, and these guys have these plastic horse heads on, and they’re like, going Rory roar. He started dying laughing. He came over and he high fived them, and he signed some stuff. And he was just like, totally relaxed. And then I was watching him, and he just, like, he just, all of a sudden, something clicked on his friend. He went into Terminator mode. Just smiled, complete, went up his face, walked in the bunker, hit it like a foot, two feet away, and and made the putt, and they went on to win. So congrats, but that was the most impressive piece of like, human
Nicholas Smith 1:20:56
emotion, Zen, Zen achievement, yeah, exactly.
Kevin Davitt 1:20:59
Sounds like he’d be a good risk manager, exactly right.
1:21:03
There. It is.
Jeff Malec 1:21:04
Awesome, guys. Thanks for your time, and we will talk to you soon. Wonderful. Thank you.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
