On this episode of The Derivative, Jeff Malec continues Chicago Month with a deep dive into the past, present, and future of derivatives and volatility at Cboe with two of its stars. 

First up, Cboe Global Head of Derivatives Rob Hocking traces Chicago’s rise as the world’s derivatives hub, from the Board of Trade’s agricultural hedging roots to SPX and VIX becoming the center of global risk transfer. Rob walks through life in the OEX and SPX pits, the culture of open outcry, the evolution from Hull and DRW to “the dark side” at the exchange, and how today’s liquidity, zero‑DTE flows, and concentrated market‑making still hold up under stress. He and Jeff dig into whether the derivative can ever outgrow the underlying, why S&P 500 remains the benchmark despite megacap concentration and global basis risk, and how Cboe balances the floor’s high‑touch block business with a mostly electronic market.

Then Mandy Xu, Head of Derivatives Market Intelligence at Cboe, joins to break down the current volatility regime. She explains what VIX really measures (and why “fear gauge” is often wrong), how Cboe decomposes VIX into bullish vs bearish positioning, and why today’s record call‑chasing and low skew feel uncomfortably close to meme‑stock and late‑’90s territory. Mandy covers the rise of zero‑DTE, option‑income and buffered ETFs, the breakdown of stock–bond correlation, the AI‑driven dispersion trade, and whether vol selling is truly “artificially” suppressing risk. The trio also find time for some Chicago vs New York banter—pizza, skylines, seasons, and sports—and a look at what’s next from Cboe, from binaries on XSP to trading KPI‑style “valuation chain” products tied to names like Tesla and Cboe itself.

From the Episode: 

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Check out the complete Transcript from this week’s podcast below:

How Chicago Became the World’s Options, Vol, and Derivatives Capital (with Cboe’s Rob Hocking & Mandy Xu)

SPEAKERS

Jeff Malec, Rob Hocking, Mandy Xu, RCM Alternatives

Jeff Malec  00:09

Welcome to the Derivative by RCM Alternatives. Send it all right, everyone. Welcome back to The Derivative, brought to you by RCM Alternatives. Where, yes, I think we did it. It’s live. We launched the new website, so head over to RCM alts.com to check it out, and drop us a line, whether you like it or not. Drop us some guest suggestions for the pod. Also, email us [email protected] All right, onto this pod, where we have a two-parter, both from the CBO or Chicago Board Options Exchange, as was formerly known. First up, Rob Hocking, global head of derivatives at Sibo, who’s a Chicago guy, was on the floor at a prop firm and now at the exchange itself, allowing us to dig into the history of Chicago as a risk city versus a capital formation city could argue New York or London. After that, we bring on Mandy Zoo, head of derivatives market intelligence at Sibo. My old job, not really, to dig into the details of the VIX and volatility space the Sibo has made famous before arguing Chicago versus New York in several categories. Send it all right, everybody. We’re here with Rob Hocking. How are you, Rob?

Rob Hocking  01:29

Wonderful, thanks for having me.

Jeff Malec  01:31

Thanks for having an easy name for me to pronounce. We were talking, my partner Bobby has a similar painting, that’s a painting of the pit, is that of the of a Sibo pin,

Rob Hocking  01:42

I don’t believe so. Actually, well, if anything, that looks about as close to the old OEX as possible. I still with the,

Jeff Malec  01:51

yeah, with the white back there, yeah, exactly.

Rob Hocking  01:54

That might be,

Jeff Malec  01:56

and give us a quick, your quick background, we’ll get into it more later. But you were in the pits, you’ve been a couple prop shops here in Chicago, you seem to have done it all. So, give us a quick background.

Rob Hocking  02:06

Yeah, thanks. I came out of University of Illinois, right in right onto the Sibo floor. Started working for Hull Trading back in early 2000 Spent, well, I guess Hall slash Goldman, right. Virtually after I joined Hall, Goldman came in and purchased Hall Trading, and so I kind of backdoored my way into Goldman. Spent about 10 years at Goldman, basically in the index of all our business, trading, trading various books. Post Goldman, actually, at the end of my career at Goldman, they had moved me to New York for oh eight traded kind of over the counter derivatives as part of our market making book, so OTC variant swaps listed look alikes, things like that. Oh eight was a crazy time of year to be doing that. It was an awesome experience, but in in 2010 or I’m sorry, in oh eight, I got engaged, wanted to move back to Chicago, do all the adult things, like start a family, and ended up coming back to Chicago by way of DRW, and so I ran global global volatility for DRW for just under 10 years, and then post that ended up here at the exchange.

Jeff Malec  03:25

Was it a little bit of like going to the dark side of the exchange, like some of those prop firms you’re constantly fighting with the exchange for better terms, yelling at fees, all that stuff.

Rob Hocking  03:34

Oh yeah, for sure. And I think that’s if anything, that’s probably made me a little more valuable at Sibo, just because I understand that side of the business, understand a lot of the tensions, and I even think, you know, I talk with, you know, many of the members on the floor, and even some of my old friends at DRW, or some of the other shops, like, you know, called CTC, Susquehanna, and I think bridging the gap between the two definitely is a good thing for the exchange, and just kind of understanding both sides of it, but yeah, you know, I think they, they know I associate with some of their complaints, having been on that side of the business.

Jeff Malec  04:09

And what were you a fan of the rebrand of Sibo from Chicago Board Options Exchange?

Rob Hocking  04:14

You know, it’s

Jeff Malec  04:15

it ruined my Chicago month lead-in. Here, I have to say Sibo instead of Chicago Board.

Rob Hocking  04:19

Well, it’s funny. It’s like I understood the rebrand, and it made sense post bats acquisition to kind of, you know, blend the two brands at the same point. It probably the hardest piece is when somebody says, “Well, what’s Sibo? and you always revert to, “Well, it’s the Chicago Board Operating Exchange, and as soon as you say that, people are like, “Oh, yeah, okay, you know, I know what you’re talking about. So it’s hard to, it’s hard to decouple the two.

Jeff Malec  04:43

It’s, it read when you look at it, it’s fine. It’s when you have to say it out loud, they’re like with a W, with a what? And then quickly, you guys are in that beautiful space in the old post office now over

Rob Hocking  04:57

here during Covid. It’s and. It’s an amazing office. They did such a nice job rehabbing this, the, you know, the old post office. They kept a lot of the call it the original charm, but definitely modernized it.

Jeff Malec  05:10

Yeah, but I was in there the first time you guys allowed us to help host an event for the return stack guys. I think we did a podcast on that. We’ll put it in the show notes, but I hadn’t been in there since the re, and I’m like, what, I don’t think I was ever in there, besides the floor level, where you mail your letters or whatnot, but it’s beautiful.

Rob Hocking  05:27

Yeah, it’s pretty cool. We have one of the rooms, it’s like a conference room, kept one of the old vault doors in the conference room. It’s pretty neat, a lot, a lot of history here, I

Jeff Malec  05:47

I kind of want to stick with the Chicago theme for a minute, and be like, why, in your opinion, why did Chicago become this derivatives hub, right, versus New York and London? Like, what are kind of compare and contrast how Chicago and then New York had it all right, they were trading the stocks, they had everything there, they should have been the equity options group, you would think, but little punchy Chicago came and grabbed it from them, and what was it, 73

Rob Hocking  06:12

yeah, yeah, 73 and yeah, I think if you, if you kind of take step back and you go even farther back, you know, Chicago was really, and the derivatives community here in Chicago has really had its identity around hedging risk transfer, and that was really a function of, if I go back to, you know, mid 19th century with the creation of the Board of Trade, so a function of the contracts that the Board of Trade, you know, first introduced were really, you know, call it agricultural hedging vehicles, and that was just because Chicago was between, you know, call it the railroads and the waterways, and it acted as a primary hub for connecting the Midwest agriculture production with the global markets, and so, as I said, you know, Board of Trade came about in 1848 and really introduced a standardized forward contract, which ultimately evolved into what you, you know, what everybody calls today as futures contracts, and so you know this institutionalized hedging allowed producers and buyers the ability to lock in prices, you know, manage uncertainty around crop production, and it provided that, you know, standardization around, call it quality of contract, quantity, delivery time, location. You go through all those different pieces, and it made all these contracts fungible, which is a huge, you know, kind of, I think it gets glossed over some time, but fungibility between all of these contracts really made them tradable and made them, you know, ultimately scalable, rather than how people used to hedge prior to that, which was, call it, you know, bespoke one-off agreements, and so that gave way to moving past agriculture, you know, you kind of go in the progression, Chicago Mercantile Exchange, or CME, you know, came into existence, expanded into livestock, later financial futures, and then, as you mentioned, you know, april 26 1973 Sibo was born, and so Chicago Board Options Exchange, obviously, as we just talked about, evolved into Sibo, and we were just founded with launching of the world’s first listed options contract, so given the city’s, you know, call it legacy and futures trading, it made it made us the natural home to extend risk transfer into those equity options contracts, and kind of why New York wasn’t really, really the place where that, where that, you know, centered,

Jeff Malec  08:41

and then you actually spun out of the Board of Trade, right? Wasn’t part of the Board of Trade originally.

Rob Hocking  08:46

Yeah, yeah, we spun out of the Board of Trade, moved across the street.

Jeff Malec  08:50

Take us through kind of light. So, when you were a member, you were in the pit itself, you were trading, or you were a clerk, or what were you doing?

Rob Hocking  08:56

Yeah, I started right when I got hired by Hall, I started as a clerk, was a clerk in the OEX, so the S p1 100 pit was a clerk in the S&PX, so the SP 500 pit spent most of my time, I would say we kind of went on a rotation, but it was between OEX, SPX, and then NDX at the time, which also traded on SIBO,

Jeff Malec  09:19

and so give us a little glimpse of the pit culture back then, right? I tell people you believe the amount of paper on the floor at the end of the day, which was just one thing that digitals made better, but yeah, give us a little pit culture glimpse.

Rob Hocking  09:34

Well, even walking in, you know, it’s like I got to admit, like I fell in, I had no intention of being a trader, let alone a floor trader. The interviews are major. What’s that?

Jeff Malec  09:46

What was your major?

Rob Hocking  09:47

I was a finance major, but the interview process with Hull just I fell in love with, and the guys I talked with, and then I stepped down to the trading floor and just, just fell in love with it. I’m an ex-athlete. I love to compete, probably to a fault, if you ask my parents. And here you go, you walk into an environment where there’s 300 guys standing side by side in a trading crowd, all competing to interact with the same flow that’s coming in, and so you know there was a certain kind of, I would call electricity to the trading crowd, and at the same time, while you’re competing with each other, there’s also kind of this sense of community, much like, you know, a team environment, like, like, as an athlete, and you’re all kind of living and breathing the markets together, the highs, you’re kind of almost, in a way, you know, celebrating the highs together, going through the lows together, just because, as you’re interacting with that flow, it tends to be, you know, very similar. Everybody manages their positions differently, but the overall markets, you kind of felt the highs and lows together, and this is a place where you could stand side by side and just compete and go nuts, and you know, almost want to kill the guy next to you, and then as soon as the, you know, closing bell would ring, you’d walk off the floor, you grab a beer with them and your best friends, and so it’s a unique environment. I almost would equate it to, you know, you look at like the Stanley Cup finals, and you have two teams that are just killing themselves, guys playing with torn this, broken that, and then at the end they all line up, they shake hands, there’s kind of this mutual respect around kind of the competition itself, and I think that’s what the floor was so interesting, like it was so cool to me, and just interesting is that you had this intense moments of competition where you’re where you’re laying prices and you’re fighting for the floor, or I’m sorry, fighting for the same flow on the floor, and then in between those trades, it was, it was friendly, and you’re talking to each other, you’re talking about the guy next to you, like, oh, my son’s birthday, and so forth, and so you know it’s a unique environment. I always kind of called it controlled chaos when you look at it from the outside, and to your point, you know, in the early days, you would just see paper scattered all over the floor, people yelling and screaming while they’re waving their hands, looked somewhat, I would argue, dysfunctional. And then at the end of the day, those, when you learned what was going on on the floor, and you just kind of learned while the hand signals are our version of sign language, it’s the way we communicate, and the process of how we went through, and how you consummated trades and and ticketed them and wrote them down, got them to the tape, that it was all actually pretty darn efficient, and that it’s kind of amazing.

Jeff Malec  12:30

Yeah,

Rob Hocking  12:30

yeah, some of the largest risk transfers there are, you know, when it comes to just raw notional dollars were going through that trading floor, and it was, it was just pretty cool to be a part of.

Jeff Malec  12:41

Yeah, I was clerk in the bond pit at the Board of Trade, and I was like the 20 something year old going to do out trades at 5:46am I’m like, this is how this works. I’m just some hungover kid, like trying to find a six lot in bonds, not recognizing that was probably like, whatever, 50 100,000 and like someone’s trying to duck the trade, maybe

Rob Hocking  13:04

like you think about it, and even today, obviously the index in S and p5 100 is appreciated to, you know, call it roughly 7500 but that’s driven, you know, right now, given our volumes, it’s like $5 trillion a day, and notional goes through the S&P, and all of that has to get exposed, whether it’s an open outcry or electronically, it all has to get exposed on SIBO to the same like group of liquidity providers, and that to me is just amazing that you have that big of a risk transfer going through every day with with and a lot of it centered on the floor.

Jeff Malec  13:40

Do you ever worry that the derivative outshines the core, right? That the tail is wagging the dog, so to speak. Like, can it become so big that you start to write? Why do we even care about what the underlying is? Just trade the derivative,

Rob Hocking  13:54

right? Well, I think you know where the underlying becomes super important, and this is where you know having an amazing partnership with S and P Dow Jones indices, is you know, they’re constantly building the AUM tied to that, to where I think right now, you know, last report I saw, the end of 2024 they had around 20 trillion tied to the S and p5 100, that’s what that’s what creates the risk transfer market that you need the derivatives for in the first place, so while, yeah, there are moments in time where maybe the derivatives market can really push, I would say, the underlying one way or the other, you’re still ultimately relying on the use case of having these derivatives that allow you to hedge that underlying exposure, and so, as long as that AUM continues to grow, I think it supports the kind of the derivatives market that we have today.

Jeff Malec  14:50

And then, slight tangential follow-up to that, do you? I see, like, you have the MAG seven, you have this massive all-time historical concentration. And in the winners take all kind of AI economy, do you think that will lessen the impact of the S P? Right, if you just have these single names, why isn’t all the flow going to the single names? Slash, my other thought on that topic is like it’s always been amazing me that there’s not, there’s not a million, there are there’s a lot of exchanges, but they’re going to the CBO, they’re going to the S&P to hedge, right, whether they’re in Asia or Europe or wherever, and taking that basis risk knowingly because of liquidity, likely. But what are your thoughts on all that? I’m not sure if there’s a question in there.

Rob Hocking  15:34

Yeah, no, I think you’re 100% right on the liquidity aspect, which is why everybody turns to S&PX in particular and the S and p5 100 complex, and you know, as you kind of pointed it out with the, with the single names, but I’ll back up and say even more from a global aspect, every I would argue correlations continue to move closer and closer to one as we become more and more of a global economy, you know, it’s like, you know, Asia is much more tied to the US, Europe’s tied to the US, Asia and Europe are tied to get, you know, it’s like things are starting to move more in tandem to where you can use the high liquidity in S&PX to be a suitable hedge, and so I think you’ll continue to see that when it comes to the single names themselves. Yeah, I think you’re always going to see some ebb and flow, and yeah, we, you know, we’ve, we’ve amassed to where those seven names are really driving the index. Is that going to lessen the need for the index? I don’t think so. I think you’re always going to have, you know, diversity, and taking something, not trading the single name, but trading a basket of 500 names, even though they’re highly correlated. There are still benefits to having the diversity of the 500 names, even when any one industry or any one sector to me gets hot and starts to dominate, and so you know you’ve still seen the utility. I would say in the 500 I would argue where you’ve seen a little bit less is more, you know, call it the Nasdaq, and the Nasdaq 100 and how highly correlated those are to those you know, call it mag seven names, and so I think with the 500 you still have enough diversification where there’s where there will always be a need.

Jeff Malec  17:10

Well, that’s always surprising to me. Like, the Nasdaq’s been the game for years and years and years. You’d think all this volume and liquidity would flow to the Nasdaq, but it has.

Rob Hocking  17:19

Well, it’s to me, that’s a benchmark thing, you know, and I don’t know how long ago you still had the Russell 2000 that’s, you know, a very active benchmark for small caps, and then you have the S and p5 100, that’s, you know, call it the most active benchmark for large caps, the Nasdaq, in a way, you know, kind of lost its way when the 500 started listing all those technology names, because Nasdaq was always obviously the technology benchmark, but now with so many of those names in the 500 it’s kind of, I can get

Jeff Malec  17:46

those plus,

Rob Hocking  17:47

yeah, right, muddied the waters a little bit

Jeff Malec  17:49

back to the your days on the pit. Did you have any thoughts on did you have like nicknames for Board of Trade guys or Merck guys? Like, what was the inter exchange competition back then, it was three exchanges back then. Yeah, I don’t

Rob Hocking  18:04

know if there was, you know,

Jeff Malec  18:06

like corn losers or something. I don’t know if we

Rob Hocking  18:09

ever really had that. It was more, you know, the Sibo guys, I would argue, were always the nerds, because you were looking at just instead of the Delta One products, it was, it was the, you know, the first derivative products, where you’re dealing with all the option Greeks, and it was just always a little, I would say, more going on, more complicated, but the Board of Trade

Jeff Malec  18:29

guys were going to stick their hand in the dirt in Southern Illinois and get a feeling for what, what the season, the yields were going to be

Rob Hocking  18:36

exactly, just, just different, different basis for the contracts,

Jeff Malec  18:40

and if you’re not on watching this on YouTube, you’re not going to see my, but you guys all had the sheets in your pockets, right? So, where would that come from, Goldman, it or Hull, right? So they’re giving you all your levels,

Rob Hocking  18:53

yeah. Well, the beauty of that is Hull never had, well, I mean, Hull at one point had sheets, but when we built the trading system, we were one of, I’ll call it two, I would actually argue the other was Timber Hill, and you know, obviously Interactive Broker that had handhelds that had real-time pricing information going through those, so we didn’t actually trade off the sheets, our values were moving in real time with the upstairs portfolio manager kind of adjusting those, whereas, yeah, you go to the, you know, other traditional firms on the floor, Susquehanna, you had Wolverine, CTC, a lot of those firms, everybody was just going through their, their sheets every day, you know, the underlying would move enough, or your balls would move enough, and you’d have to re-snap them, you’d see the clerks coming in with the stacks. Fun fact, when I went to DRW, many years later, their Eurodollar traders, you know, Don, Don cut his teeth in the Eurodollars pit. They, the senior trader that ran the desk, loved sheets and was very comfortable with sheets. So every day, you know, and we’re talking now, fast forward your 2010 and on, I was two. Basically, a DRW from 09 through, call it end of 18, there was a, you would hear them every day at the end of the day, that’s don’t, and it was the machine that was folding everybody’s sheets, because they still wanted to use them, so they were, they were still being used as of, call it 2018

Jeff Malec  20:18

but my, I was the clerk looking at the bond option pit, bond futures options, and right back to the bond futures pit, and I can never forget that look when basically the market went off their sheet. Ghostly look of like, oh crap, what do I do now?

Rob Hocking  20:33

Yep,

Jeff Malec  20:33

looking around, somebody get me a new sheet, I So you mentioned Dr. W and Hall. We had a good piece on how Hall trade in the because basically the Dow futures predecessor, I’m not going to the MMI index.

Rob Hocking  20:57

Yep,

Jeff Malec  20:57

like he bought some of those on October 87 during the crash at the Lowe’s, and it basically like created a bid and got the market to come back up, but talk through a little bit of like your experience in the Chicago prop world, what that has been like, like why is that a thing, why wasn’t it a New York thing, or did we just kind of brand it differently than New York? Any thoughts? No,

Rob Hocking  21:18

I mean, I think it was just different roles, quite frankly, like you mentioned, O’Connor, Hull, you know, like some CRT, a lot of these firms, you know, they, they specialized in reading order flow, how to price that order flow in real time, how to understand, you know, understand managing the inventory associated with trading up and back in that flow, if you look at the banks, and even where I ended up at Goldman, you know, they ultimately controlled that end user flow, but it was a slightly different game, you know, they had customers, they needed to provide services to those customers, mainly capital leverage, whereas the prop trading firms in Chicago, we, you know, we didn’t have customers, and we were solely focused on providing that real-time pricing, managing that inventory. I would argue, you know, we did it faster to where it worked, you know, tangentially to what the banks were doing, but it was just a slight different nuance. And so, you fast forward, you know, with Goldman buying Hull, I think that’s, you know, GS recognized the ability to pair those two to take, you know, the pricing and the electronics around pricing and and inventory management and kind of dump that into their customer business that moved a little slower and really saw kind of, you know, the synergies between those two, and then the likes of the, you know, the DRWs, the Citadels, the jumps today, they’re they’ve just evolved that model and have continued to go and grow faster and faster and more sophisticated and more sophisticated, to whereas now kind of where banks start and end and those firms start and end, I think is just much more blurred as as the whole market has evolved, but you know, in the earlier days, you know, we provided a great service to the banks, because it was just that real-time fast pricing, whereas they provided the flow and the end users and the capital for all those end users to trade, so you know it’s always worked pretty well together.

Jeff Malec  23:18

Basically, you were the market, you were making a market for them on on what they needed to get done, but it’s also fair to say the prop firms are kind of playing the game within the game, and the New York firms were kind of playing the game of like doing cash flow analysis, and like, hey, where’s what’s his products, what’s this company’s product lineup look like, and how are sales and prop firms really didn’t give a crap about that, they’re just like,

Rob Hocking  23:41

yeah, what’s the flow

Jeff Malec  23:42

look like? How can I play the game within the game to get an edge?

Rob Hocking  23:45

That’s right, which is, how quickly can I get, you know, if the flow is one-sided, how quickly can I absorb it, absorb the edge, turn it, and try to get it off the sheets? If there was good two-sided flow, either on a product or on a particular day, how can I sit there and just bid ask, bid ask, bid ask, and capture that edge, but yeah, it was a very, very different.. you didn’t, you, you very rarely cared about, I would say, the argue arguably the fundamentals of the companies themselves, it was more how that flow was interacting with the market, which is always funny when I used to go to even family occasions, you run into old friends, and they’re like, “Oh, you’re a trader, tell me what stocks to buy, and I’m like, “Dude, I don’t.. I don’t have a clue what stocks you should buy,

Jeff Malec  24:29

depends on the hour. Yeah,

Rob Hocking  24:30

yeah.

Jeff Malec  24:32

And talk a little bit, when you were at Hull, and then at DRW, was there still the model, like the old Chicago prop trading model, was find a talented guy, girl, come in, put up some money, we’ll give you half the profit, 60% of the profits, whatever. Like, did you see that model? And do you think that model still exists? Seems like that has gone away in the current regime, kind of.

Rob Hocking  24:53

I would, it still exists. I think it also depends on the asset class you’re trading. For some of the asset classes, when you get into SBX and. As they grow to the dollars we’re talking about, you need a team to be able to support that. You may have your head trader that’s sitting there running the book, but it’s a lot harder to take a bunch of little sole props and kind of back them and be able to compete in that space. Now, there’s other products and other asset classes where I think that still exists today and will continue to exist, because it’s just not the sheer size of the market that you need the infrastructure for, so yeah, as far as I know, there’s still businesses within the firms you mentioned that are kind of those supported businesses, it’s just some of them have have evolved to just needing a bigger footprint to be able to compete,

Jeff Malec  25:38

and then talk a little bit about right, the market makers, the citadels of world, get a little bit of a bad rap at times, of like, oh, they’re buying the order flow and it’s nefarious, and all this, of like, no, they’re also providing a service, like, without them, what would it look like? I guess

Rob Hocking  25:54

that’s right, yeah, I think, well, a lot of that is how market structure has evolved over time, right, and so when you start to introduce free retail trading, there has to be a way to drive value to making those markets, and it used to be kind of fee-based, and now it’s not fee-based. So, how do you do it? Well, you start to take the fees and put it into the bid ask spread, and so you pay for that really

Jeff Malec  26:19

free, which is that’s right.

Rob Hocking  26:20

Yeah, it’s not really free, but you, you aggregate people, blame like the

Jeff Malec  26:23

market makers for that, like, don’t blame them. They were just enabling the Robin Hoods of the world to do that, to offer it to you for free.

Rob Hocking  26:29

That’s right. It’s just, it’s, it’s a different, different sticker, you know, different sticker shock at the pump, the way it’s being, the way it’s being, you know, kind of wrapped up. But yeah, those aggregators are crucial, like you need to bundle all of that flow together, and you need to allow the market to interact with it, and I think you know Citadel is obviously very successful in doing that, and understanding the market structure, and how to, you know, best create the environment that the customers need, and the flow that they need, and in turn keep it in in a profitable way that they can continue to support the business, because ultimately you know people hate to hear it, but like unless every, unless all the different pieces are making money, then they don’t stick around and are able to provide that service, so kind of everybody needs to be able to make some money in the process.

Jeff Malec  27:18

Yeah, and talk through that for a minute, if you could have, like, COVID, I guess. I’ll throw out there, and Vix Mageddon will say, but a few of these periods where the market maker, and that’s a big fear now, like when these market makers become so big, and they’re such a big part of the what happens when they step back, right? If they put their hands in their pocket, is there no liquidity? Is the market kind of gunk up? Yeah, your thoughts on how that all operates.

Rob Hocking  27:42

Definitely changed the dynamic, obviously, over my time, just interacting with the with the S&P, and seeing how many different market making firms there were, you know, 25 years ago were in the pit, and now where it started to consolidate into the bigger firms. Yeah, you run a little bit of a concentration risk when it comes to liquidity formation, it’s something we at the exchange are paying attention to every day and trying to make sure that we’re making the right decisions from a market structure standpoint and from a platform standpoint to incentivize as much competition as possible, so yeah, it’s something we watch, and then as you point out, when there’s certain market, you know, call it moves or situations where flow becomes very, very one-sided. It, you run that risk that a few guys step out from the market and it just has bigger gap moves. And so, yeah, I don’t think there’s a, there’s a great answer for that, because you still need the economy, like you need these big firms to be able to scale at the same point, you want as much competition as possible, and I think the exchange is just trying to balance those two,

Jeff Malec  28:47

but and I would argue you guys have done a heck of a job, and all the exchanges have, like, we haven’t seen a really nasty, I’ll leave out LME in the nickel, but besides that, we haven’t seen an exchange get into big liquidity issue, like the these are big liquid products, and they remain so even during crashes, like you can quibble about, like, hey, the spread went from,

Rob Hocking  29:08

yeah,

Jeff Malec  29:09

super tight to somewhat tight, or even wide, but still there’s a spread, still you can get done what you need to get done.

Rob Hocking  29:17

Well, we’ve, we’ve gotten lucky, you know, when, when zero DTE first entered the kind of picture, you know, people were very afraid of that one-sided move, and and increased volatility in the product, and arguably, you know, like the first customers that moved into Xero DTE were all call it retail-based customers. Over time, though, the balance we’ve seen in some of these products is great to see. So zero DTE today is very balanced, it’s about 5050 institutional to retail, it’s very balanced in spread trading versus outright buys, very very small percentage of the flow is nak. Selling of options, I think it’s under 5% right now, and so that balance to me is what’s creating the market structure that will, you know, not have the big crash that you’re talking about, that you have so many kind of differing strategies that allow them all to enter, interact, create a really strong liquid market, because there’s different strategies using the product for different reasons, and the balance between institutional and retail just helps to solidify it against some of those moves that you’re referencing

Jeff Malec  30:42

you mentioned. mentioned you guys buying bats, and you’ve mentioned the floor a few times. Like, let’s talk about there still is a floor, which is different than some of the other places across the street. So, talk about all that, like from floor to electronic to global, not just in Chicago.

Rob Hocking  31:00

Yeah, well, you know, I will say Sibo, and I didn’t work for the exchange at the time, but Sibo was was pretty brilliant in their hybrid model, and kind of creating the ability for the electronic market to work side by side with the open outcry market and allow customers to kind of have that best of both worlds situation, and it’s the same

Jeff Malec  31:20

actual product, like, whereas for trade kind of separated, you have Globex, you have this

Rob Hocking  31:25

right, same product sitting side by side, you can trade them in parallel, and an interesting fact, you know, over time the percentage of flow that’s trading electronic versus open outcry has definitely migrated to electronic, that isn’t because the floor volumes are going down, the floor volumes have more held constant, but it’s just the electronic volume, especially with zero DTE, have just skyrocketed. But right now, call it, I think, around 8080, between 80 and 85% of the S&P flow trades electronically against about, call it, you know, 15 to 20% trading in open outcry, however, 58% of the notional value traded in S&P trades on the floor, which is kind of a wild thought, you know, like 85% of the flows trading electronically, but call it that, 15% of the flow represents 58% of the notional, so it’s just large trades, large risk transfers. You can imagine what those large risk transfers that can be somewhat complex, and there’s still a place for that high touch interaction with a broker. Like, hey, can you quote me this? Oh, wait, I want to change this leg into this leg. Oh, in some situations, oh, you know, I lifted this, and I actually had the wrong month. Can I, can I get out of this and quote this? Like, all that electronically is a nightmare. Once you click and send enter on that order, it’s out there, you’re not getting it back. And if you interact with somebody, there’s nobody to call or look at to say, “Hey, will you will you bust this and trade this? So, a lot of times, with these larger risk transfers, having that high touch interaction with the floor is still very much not only valued, just demand it. They need it. We saw that in COVID. You had mentioned COVID when we had to close the trading floor, is the first time we ever had to close the trading floor, but the markets were open. We’ve had to trade close the floor because the overall market we had to close, like Hurricane 911 yeah, but this we had to close while the market was still open, and some of that kind of liquidity and price discovery went went awry because we didn’t have the floor, you didn’t have those markets you could call down to, you didn’t have the ability for the large risk transfer, especially during a high vol scenario like Covid, when we didn’t know what was going to happen. The floor still, you know, to this day provides a massive amount of value, and Sibo has always taken the stance, because people ask, like, oh, when are you going to migrate to electronic, and like, as long as there’s value being had down there, we will continue to support having the floor, and if anything, I would argue we’ve recently started investing in it more and more, we just signed a contract with CNBC, where they’re now doing live broadcasts from the Sibo floor, because it’s an environment like you’re even talking about, it’s an environment people love to see, they love to know what’s going down there, it’s energetic, and so makes you feel,

Jeff Malec  34:17

as a retail investor, you’re not getting taken advantage of, there’s actual stuff happening there. Yeah, yeah, Rick Santelli is always over there now, right? Yeah,

Rob Hocking  34:27

yeah, Rick’s down there. CNBC just hired new broadcaster Oliver Rhetoric, I think he came from the Schwab network or one of those other networks, and he’s been great. But yeah, we’re just starting to ramp up broadcast, but we’re excited to have that relationship. And then, is it

Jeff Malec  34:44

also a problem of, like, you? I guess it could be coded, but at some point you’re like, we can’t code every possible option, order change everything like into the an electronic system, like it’s just too much, and maybe if you could, it’d be too hard to even navigate. The platform,

Rob Hocking  35:01

it’s yeah, it’s tough. I think our power stations down on the floor can handle up to 100 legs of an order. I’m not sure what the electronic limitation is, but even if you had to try to put 100 legs into an electronic ticket,

Jeff Malec  35:14

now you’re having to manage it. Yeah, the

Rob Hocking  35:16

floor is just a much, much better way to manage those high kind of complex trades,

Jeff Malec  35:24

so far until, until the AI takes over. Oh yeah,

Rob Hocking  35:27

you never know when that’s gonna change.

Jeff Malec  35:30

What’s next for you guys? Anything big product-wise on the, or just keep doing what you’re doing?

Rob Hocking  35:36

I think it’s an extension of what we do today. You know, we’re very interested in the prediction space. Obviously, in many regards, I think VIX was one of the first prediction tools. So, moving into that space, we’ve talked about introducing binaries on the S and P, which will be coming out june 15. We want to follow that up with looking into how you trade KPIs on individual companies, so things like the number of cars Tesla delivers, we view those one as you know those are securities, and even though they’re trading on some of these platforms like Kalshi and Polymarket, that they need to trade on a securities venue because they’re directly tied to the performance of a security, so we’ve been pretty vocal in that, so we want to give the market an ability to trade those on a securities platform, and try listing them, and I think of them kind of like this. If you have, you know, if you have KPIs that you can launch, and you look at things like number of cars that Tesla delivers, that’s a valuation point or a data point that’ll go into a company’s EPS and revenue. The EPS and revenue go into the stock price, stock price goes into the sector price, sector price goes into the index price, and now you know you can come to CBO and kind of trade the entire valuation chain, and that’s kind of like where our minds are, and we’re trying to figure out how best to bring that to retail and institutions alike.

Jeff Malec  36:57

I just clicked in my mind, like, if that’s a super important KPI to me, if I think that’s what drives the whole stock price, that’s what I’ll want to trade. Yeah, one kick or take that out, take that risk out. Yeah,

Rob Hocking  37:08

right. Think about spreading those types of things. If I think about SIBO, and in particular, in our public stock, you know, you have metrics like index, you know, prop volumes that obviously drive our revenue. You also have multi list in our multi list market share. Well, maybe there’s a day where somebody, based on their risk exposure to SIBO, wants to go short index and long multi list, or vice versa. And so, having those components to be able to trade like that, I think, can be super valuable to kind of those end users, and you can even think of institutional applications to where, like, I think of something as complex as, like, a dispersion trade, where you’re taking all the individual name balls traded against the index. Well, what if now you started taking all the individual name components traded against the name itself, or something along those lines? I think it starts to introduce a lot of interesting relationships and ways to manage risk, I

Jeff Malec  38:10

I’ll let you choose your own adventure of want to talk sports, food or touristy stuff.

Rob Hocking  38:18

Ooh, well, sports is pretty topical right now. I think over the weekend with the whole, yeah, exactly, that’s what I was saying with the board vote on moving it to Indiana. I don’t know how I’m still not sure how I feel about that at the moment.

Jeff Malec  38:32

Don’t you think it’s still just a smokescreen? They’re just doing everything they can to put

Rob Hocking  38:38

the, you know, I hope that’s the case, but in, in the past, like some of those market events, I would argue, you know, the first election with Trump, Brexit, you just kind of never really thought it was going to happen, and then you wake up and, oh, it happened, so I’m nervous that this is a similar situation, where, yeah, I just kind of keep sitting here not believing it, and, like, oh, there’s a loophole, they’ll find a way out until the morning I wake up, and I have to drive to Indiana to see a game,

Jeff Malec  39:06

and of course, right when we’re good, and we have all this hope, and got killed, everything’s happening, and we’re like, oh, we’re moving to Indiana, like, what

Rob Hocking  39:12

exactly? I know,

Jeff Malec  39:14

idiots, what, that’s your favorite sporting event to go to, or you Cubs or Sox, or what?

Rob Hocking  39:19

I grew up well. I grew up with a father who was a Sox fan, but I ultimately was a Cubs fan.

Jeff Malec  39:25

There you go.

Rob Hocking  39:26

I, yeah, obviously Wrigley, I consider the largest beer garden in Chicago, so I love going to games there. Been been a Bears fan, I get, I you know, probably the sporting events I love to go in the most were Blackhawks games, so hopefully they can, they can, they’re on the upswing now. They keep getting a lot of young, young talent, and hopefully we can turn that around and go back to the days of glory, back with Kaner and Tays.

Jeff Malec  39:54

Let’s hope my quick story, the out of Bears game, the most Chicago thing ever. There’s a guy like three seats. Down, it was cold as could be. He like reaches over, he taps me. He’s like, “Want pork chop? Like, “Excuse me. Like, “Do you want a pork chop? I’m like, “Sure. He reaches out of his jacket and has a pork chop wrapped in tin foil, hands it down to me. It’s still warm.

Rob Hocking  40:15

That’s outstanding, just

Jeff Malec  40:17

gnawing on a pork chop there at the bear.

Rob Hocking  40:19

Yeah, there’s certain things, but certain things in life that you got to experience, and yeah, that the Bears game in the freezing cold is something that everybody should experience, and if you’re lucky enough to sit next to the pork chop guy, it’s just that much better.

Jeff Malec  40:33

I hear you. And then throw out a quick, you guys still do tours of the floor, right?

Rob Hocking  40:38

We do. So any

Jeff Malec  40:39

listeners like go see it. You’re saying it’s not going to go any away anytime soon, but we didn’t think the Bears would move to Indiana either. So, go see it before it’s potentially gone.

Rob Hocking  40:49

Yeah, we are going through right now. It was part of the CNBC deal, a complete new build out of our customer experience center, and so I think it’ll be ready more towards the end of this year, early next year. So, right now, tours are kind of on hold because there’s construction down there right now. We’ve ripped apart kind of the whole eighth floor viewing, viewing uh room, and we’re building out a whole new experience center that we can hopefully bring to Chicago and get a lot of, you know, a lot more foot traffic up there to see what floor trading is all about,

Jeff Malec  41:21

and then your coworker Mandy Sue’s coming on after you here to talk VIX and volatility, in particular, give us a quick pitch on Mandy.

Rob Hocking  41:31

Oh my god, Mandy’s the best. We were so lucky to get her, you know, derivative strategist that came over from Credit Suisse, longtime industry expert, super well regarded. I think the way she breaks down some of the data into really digestible understandings of what’s going on and how that flow is interacting in the market. She’s second to none when it comes to doing that, so it’ll be a real treat. I would say, get into the weeds with her, you can’t stump her. She is brilliant when it comes to that stuff. That’s awesome.

Jeff Malec  42:06

All right, Rob, thanks so much. All right, everybody, we’re here with Mandy Zhu. Mandy, how are you?

Mandy Xu  42:21

Good, thanks for having me, Jeff.

Jeff Malec  42:23

Thanks for coming on. You’re here in Chicago Month, and I was like, great. I’ve always wanted to have Mandy on. She’s in Chicago, she works for the CBOE. It’ll be perfect. And then they’re like, no, wait, she’s in New York. I’m like, oh man,

Mandy Xu  42:35

yeah,

Jeff Malec  42:36

exactly. We’ll ignore that for now, and we’ll say, you know, had to have a volatility and VIX expert on during Chicago months, since that’s where it all started, I think. So,

Mandy Xu  42:45

yeah, for sure.

Jeff Malec  42:46

Give us a quick little background of how you got into this biz and what you do at, and what I’ve still.. I’m old school, I call it CBOE, but you guys rebranded and want to call it CBO, now, right?

Mandy Xu  42:56

That’s right, yep.

Jeff Malec  42:57

Okay, I’ll try and remember Sibo. So, how you got into this line of work and what you do at CBO?

Mandy Xu  43:03

Sure, so I run the derivatives market intelligence team here at Sibo. So my team produces market commentary analysis on themes and trends that we’re seeing in the derivatives markets, and as you mentioned before, you know, we’re the home of S&PX and VIX, all things options and volatility. So it’s been a really great gig. I joined Sibo about three years ago, and before that, I spent over a decade, almost 15 years at Credit Suisse, running derivatives strategy, so doing something similar, but from a sell-side bank perspective, you know, sitting on the trading desk, you know, writing trade ideas, providing commentary for me, that you know, the switch has been actually really good, because, as we know, you know, especially in recent years, retail is a bigger and bigger part of the options market, and being at CBOE, you really get kind of a front row seat on that, you know, on that trend.

Jeff Malec  43:54

Now, was Credit Suisse XIV, and that whole mess, or was that different? So, you were there during that, we

Mandy Xu  44:00

were, we were, I was there for many, many exciting, and maybe not so exciting moments, but yeah, you

Jeff Malec  44:05

had a front row seat to that, right? Well, I’m forgetting my history now, was that Covid when it spiked, when it was big,

Mandy Xu  44:12

so that was the lead up to Volmageddon, if you will, right? Yeah, February of 2020 18, when the VIX spiked more than doubled in a day, and then all the kind of two times levered inverse products kind of all blew up as a result. It was a, it was an event that was, I would say, much anticipated by the market, in the sense that everybody had been tracking kind of the growth in those VIX products and VIX ETNs, and saying, look, it’s not sustainable, at one point we’re going to get a big VIX spike, and these products will blow up, but you know the question obviously was, when that was going to be. So, yeah, those were exciting times,

Jeff Malec  44:47

those were great times. And I think we’ll put, I think we have a blog post on that, maybe a podcast on that, back in the day, so we’ll put that out in the show notes for everybody. So, give us kind of with that as a backdrop, give us the current. A state of volatility. Do you see any such issues on the horizon now?

Mandy Xu  45:05

So, right now, I feel like leverage isn’t the issue. What is maybe worrying me a little bit is just how consensus the positioning has gotten in terms of the extreme bullishness in the market. So, every corner of the options market, wherever you look right now, the theme is just upside chasing through buying of calls, and this you see from both retail as well as institutional, you see single stock options as well as index options. So, a couple of stats that we highlighted in our weekly piece this week, you know, we were seeing almost record call buying activity from retail, I think around two thirds of opening activity from retail investors on our exchange right now is bullish in nature, so most of that is buying calls outright, some of that also is selling puts to open, so both of these trades we consider more bullish, and this is kind of the highest level of bullish activity that we’ve seen since the peak of the 2021 meme stock era, and then if you kind of step back a little bit and look at the broader market, not just retail, but if you look at, you know, for example, like the put call ratios hitting extremes that we haven’t seen since outside of 2021 the meme stock craze, as well as the late 90s tech bubble, so these are some, you know, that when we, when you’re making parallels or you’re reaching levels last seen those periods. I think it definitely gives me pause. And then the last thing that I would highlight is, you know, the one difference between now versus what we saw kind of during the COVID era was in 2021 there was a lot of optimism around like single stocks, right, like mean stocks in particular, and particularly from retail, but on the institutional side, actually, there was quite a bit of risk, like not risk aversion, but like still a lot of hedging activity going on on the institutional side. So, if you look at like index volatility, index skew, index convexity, all of these risk metrics were actually very high, suggesting actually a lot of hedging activity. Right now, we’re not seeing any of that, so we’re not seeing any demand for puts measures of skew convexity, all these measures of downside risk in the market at multi year lows is, you know, concerning me a little bit in terms of kind of the positioning and the setup in this current moment,

Jeff Malec  47:13

so lots to unpack there. A or one, how much do you guys internally or you personally do attribute to like Robinhood and the growth of tech and mobile, and all these platforms that allow retail to easily place these option trades. You think that was, was it that enabled the growth in the volume, or the volume growth enabled those platforms to exist?

Mandy Xu  47:36

Definitely a huge contributor, I would say, in terms of, you know, catalyst for this retail boom that we’ve seen over the past five years, the ease of trading, right, with a, with everything going mobile, is certainly, is certainly a major contributor. The other one that you know, I always flag, is just, you know, commissions going to zero, right. So, Robin Hood, obviously, in 2019 was the first retail brokerage in the US to cut commissions to zero, but then soon after every major brokerage essentially followed. So, when you have, you know, ease of trading going up, the cost of trading going down, and then, of course, during Covid, retail investor having a lot of time on their hands to learn about the market, learn about trading, can that’s like the perfect storm of getting more people involved and active in the market, and of course, since then the performance in the market, kind of, this, you know, this breathtaking bull run that we’ve been on, you know, 2022 notwithstanding, has obviously kind of just added fuel to the fire.

Jeff Malec  48:30

And then on that meme stock, how much credence do you give to that whole back during GameStop? During all that, the market makers had to hedge, right? They were selling the options, they had to hedge, they were.. it was kind of a self-reinforcing ladder up that the market makers had to hedge and buy.

Mandy Xu  48:47

Yep, yep. Do you see

Jeff Malec  48:49

that happening? Do you think that pushes prices artificially higher?

Mandy Xu  48:52

So, whenever you have such outsized positioning, where you know customers are all buying options and market makers get massively short options, so short, like the technical term, short gamma, like it certainly can impact the underlying price performance, because you know they’re hedging with the underlying when they’re short all these options, what it means is they’ll have to hedge in the same direction as the underlying stock moves, so if the stock is going higher, the way you know to hedge the option position is like it has to buy more more stock, so definitely. Can I would say the difference between now versus 2021 was at 2021 This craze was going on around these lesser liquid names, right? Like, if you GameStop, AMC, you know, there are a couple of others out there. This time around, this bullish sentiment is really concentrated in the mega cap tech names, right? So, Nvidia, Tesla, all the chip stocks, I mean, they have, you know, huge underlying liquidity as well. So, you know, could it have an impact? Certainly, but I don’t think it’s, you know, to the same degree as maybe we had in 2021 where the retail, you know, fervor, if you will, was really concentrated on these really illiquid names, where, you know, the underlying. Wasn’t really traded a ton, but you know, when you’re talking about Tesla and Nvidia, which are some of the most traded names in the world, I would say the option positioning, you know, while the margin can have an impact, but I don’t think it’s the main, the main thing that is driving these stocks higher.

Jeff Malec  50:16

And then, while we’re still on the topic a little bit, right, the market makers were made the boogeyman, so to speak, back then, of like nothing’s actually free, right? Your Robin Hood commissions aren’t free, they’re selling your order flow and all that. Do you think that’s a bad thing, or it’s actually right, like it can be construed as like they’re evil and they’re selling this and they’re making tons of money off it, but I’m right in the pit, there were locals, they were filling orders, it wasn’t necessarily a nefarious thing, it’s just how the system works.

Mandy Xu  50:43

Yeah, yeah, and I think, as long as it’s exposed to competition and it’s still even being executed at fair prices, I think certainly you know that the benefit could outweigh the potential costs, I

Jeff Malec  51:03

On to the VIX, right, Sibo, home of the VIX. We’ve got a VIX white paper, we’ll put in the show notes too. I think it was Mark Cuban who actually came to, I can’t remember, the bank, Goldman or whatever, and wanted to kind of create a variance swap around his position, and they said, like, we should make this a product, but is the VIX still as popular as ever? What’s your take on the VIX? A lot of people thought zero DTE, all this is kind of removing some of its validity. What are your thoughts?

Mandy Xu  51:31

Yes, sure. So, in terms of popularity, I would say, you know, we’re seeing record volumes year after year in the VIX, so definitely it’s still more popular today. I would say, in terms of a tradable instrument, VIX options specifically, I’m looking at, but in terms of the, as an indicator, as a benchmark for sentiment, I definitely think it’s still relevant. Now, I do think there is some misunderstanding around what exactly the VIX measures, right? So, you probably heard the nickname for the VIX, which is the fear barometer, or the fear gage, and we’ve tried to push back quite a bit on that nickname, because we think it’s a little misleading in that what the VIX really measures is positioning in the underlying S and P options market, and that can come from both demand for puts as well as demand for calls, and what I think trips people up is that sometimes the VIX is going up, not because necessarily there’s a huge jump in demand for puts, but actually demand for calls and bullish sentiment. So, being able to disentangle what is exactly driving volatility higher, is it coming from bearish trades or is it coming from bullish trades? I think is actually really important. So, what we’ve done actually in the past year is develop what we call a VIX decomposition framework. We have a white paper out on it. We have several videos. We actually have a web portal where we upload this analysis on a daily basis, but essentially what we’ll do is break down the daily change in the VIX into several components that really give you further clarity in terms of the positioning, right? Like, how much of the increase in the VIX is coming from an increase in bullish versus bearish positioning, and where this kind of really comes into play, and what heaven we highlight this in our paper is, if you look, for example, at the two biggest VIX increases of the past, like, say, five years, which is, you know, August of 2024 which the yen carry unwind, which, you know, pre-market VIX went to 60, everyone freaked out, and then obviously also post Liberation Day, the day when S&P sold off 6% If you look at those two dates in particular, close to close, the VIX had the same amount of move, right? It was up 15 points close to close on those two days. So I think to the layman, they would look at this and say, oh, similar amounts of fear in the market, similar amounts of bearishness, if you will, but when we run the decomposition, what’s really interesting is that in August of 2024 that increase at demand and increase in the VIX was almost entirely coming from demand for puts. People were selling calls and buying puts and hedging in the market, and there was a lot of fear out there, but post Liberation Day, that April 2025 sell-off in the market was actually the opposite. The biggest increase was coming from the call side, it was actually people coming in, buying upside calls, kind of playing for a reversal on the tariff policy. You know what we’ve now kind of termed the taco trade. You really start, you saw that in the beginning of April of last year, and if you just looked at the headline VIX number, I think you would have missed the bigger story. So this is something that we’re trying to do, is just provide more clarity and more transparency into what is exactly driving the VIX, and I think that will hopefully, hopefully help inform trading decisions better.

Jeff Malec  54:41

I love that, because the classic example was always just back, oh, in 99 the market was screaming so high that vol was actually increasing, while the market was rising without any real stats. I’ve done that, a lot of people I know just point to that, of like, oh, there was a time versus now you’re saying it’s happening multiple times a year, right?

Mandy Xu  55:00

Yeah, I think people get exactly to a point, like they’re like the times when we get the most inbound, I would say increase around like what’s going on with the VIX. The first would be, you know, exactly what you point out, is like when the market’s going up and the VIX is going up, or markets going down and VIX is going down, because typically you would expect that negative correlation, but actually 20% of the time the two move together, so S&PX and VIX move in the same direction, so being able to actually explain why that is, I think, is important to help people understand exactly, you know, what drives the VIX, and then the other kind of case where we get a lot of questions is when you know the VIX either under reacts or over reacts, so obviously in August of 2024 we got a lot of inbounds because you know pre market VIX was up to 60, you know that was considered like overreaction in the market, so people wanted to know exactly why that is, and that’s why you know what we decided to run this decomposition and create this decomposition to really help people understand what is the underlying positioning in the S&P market that is driving the VIX number,

Jeff Malec  55:56

and then what, but to give any credence to zero DTE and all this massive buffered notes, and call overwriting all this stuff, dampening the VIC, artificially suppressing the volatility, or not so much.

Mandy Xu  56:10

Yeah, sure, that’s that’s a great question, a popular one that we get. So, zero DTE, I would say no, and because only because the VIX is actually not like touching any part of that part of the curve, right? VIX is one month, it’s forward looking 30 day expected volatility in S and P, so actually doesn’t look at the flow that’s happening in the zero day, but we do get a lot of questions around, you know, the rise in the buffered ETFs, the option income ETFs, all the vol selling that we see going on right now, is that dampening the VIX, and I would say on the margin, perhaps. Yes, right, but I don’t think it’s the overwhelming or the dominant factor that is driving the VIX lower, and a couple reasons for that. So, first, if you look at, like, what is going on in equity volatility, in the VIX is very commensurate with what we’re seeing in other asset classes, right, with credit volatility, with FX volatility, rates volatility, so that to me, that’s much more tells me it’s more of a macro fundamental story rather than a positioning story. And then the second thing is, you know, if you look at just like the S and P volatility surface, if you think what is really driving volatility lower is just the incredible amount of money that is in these coal overriding ETFs, if you will, you would expect, for example, like S&P call SKU to be very, very low, meaning the out of the money calls to be very cheap, because that’s, you know, where all the selling pressure is. But, in fact, as I mentioned earlier, like, we’re actually seeing the opposite, that the calls are really big, and that tells you that, you know, the market is very liquid. There are many different participants in the market. Yes, we have this, you know, huge community of call writers, vol sellers out there, but we also have a lot of investors, retail, institutional, tactical players out there, kind of buying those upside calls in the market, so no one, you know, investor type is the dominant, it’s really kind of speaks to the the the depth of the market, and just how big and liquid the S&P market has gotten, that no one investor type is overwhelming relative to any other.

Jeff Malec  58:10

Do you internally and personally look at is the tail wagging the dog kind of concept, right? Can the derivative, can the options get so big that it starts moving the underlying, and then you have this weird, like, circular, the snake eating its own tail, kind of a thing.

Mandy Xu  58:25

Yeah, that’s a fair question, and definitely one that we’ve gotten a lot. So, two things I would say, the majority of the growth on the option side that we’ve seen in recent years have all come from the zero DTE part of the curve, right? The same day options trading, which now is over 60% of the S&P volume on any given day, and a lot of people look at that and the growth in that, and you know, think that, you know, could this be having an impact on the underlying market, and one of the things that we’ve been noting, and actually published pretty extensively on, is that the positioning in the zero DTE market in SPX is very different from, like, non-zero DTE options, and that it is very balanced between buyers and sellers. So, I think the preconception, or the misconception that people had initially was that people were mostly using these zero DT options for speculative purposes. So, investors were mostly buying these options, market makers were short these options, and therefore the hedging and the underlying, you know, these options could become kind of overwhelming to the to the broader market, and what we’ve kind of shown is that for both retail and institutional investors, you actually get a decent split between people who are using it for, you know, hedging or speculative purposes, and as well as investors who are using it for income for selling options, and the way they’re selling these options are typically through spreads or iron condors, or like very capped in terms of the risk, but that’s something that you know I think kind of helps to address the fear of the options market having an impact on the underlying, and the other trend that we’ve noted is just, you know, more and more people shifting their trading away from. Futures towards options, just given the liquidity and the depth that we’re seeing, particularly on the zero DT side,

Jeff Malec  1:00:07

and that’s my theory on the VIX, that if you, yes, the time frames don’t line up, but if you have people moving from the 30 day options to the zero DT, right, they’re like, hey, I can better, I’d rather sell these daily now instead of selling them every month or every quarter, so you kind of move some of that volume and create this bubble in between those two exposures.

Mandy Xu  1:00:28

Yeah, so certainly I would say that the zero GTE as a, as a share has, you know, obviously exploded in terms of popularity, like I mentioned, it’s now 60% of the overall volume, but the I think that the what gets missed in that is that the pie overall pie is also a lot bigger, so if you actually just look at absolute volumes of like say 30 day options or like non zero gt options, it’s also increased over the past five years, it’s just nowhere near at the pace that we’re seeing in the zero gt size, so yeah, no, but you know that is a fair point.

Jeff Malec  1:00:57

Where do you see for profit exchange, so they say, “Hey, let’s do six hour options and hourly, right? Do they just keep going down in time frame, be like, “Hey, it’s more, more and more product?

Mandy Xu  1:01:09

Certainly, I mean, certainly could happen. I would say, you know, from the Sibos perspective, our focus right now is actually in bringing more and more investors into the options ecosystem, so we talked a lot about retail trading zero DTE, but what we find is actually the retail investors are active in zero DTE options tend to be actually very sophisticated, and the universe of traders and investors who don’t even look at options right now is obviously much bigger than the universe of investors who are actively trading zero DTE, so what we want to do is really educate those investors who are not currently using options, some of the benefits of options trading, and doing that by making it simpler. So, one of the things that we’re launching, actually later this month, is binary options on XSP, our mini SPX contract. So, simple, yes, no, right? Like, will the S&P be above this level at the end of the day, yes, no, so it’s, you know, kind of like the prediction market, if you will, and bring that to S and P, and that I think the appeal of that for retail investors who, who’s not currently trading options, is that you don’t have to learn about puts and calls and strike prices and delta, vega, gamma, or any of the other, you know, more complicated things, that’s just getting them interested in the market, you know, what is the S&P going to do? And then what we find is that when investors become more active trading, more active and following the market, they will naturally want to learn more about other products out there, and hopefully they will learn this will be the start of a journey in terms of learning about options and getting more investors interested in trading options, so switching

Jeff Malec  1:02:51

gears to the S&P, right? Do you, how is it withheld this long? Right, you, I could have seen a scenario where the Nasdaq took over many years ago, and all these things, but the S&P is still where the entire world comes to hedge.

Mandy Xu  1:03:03

Yes, right.

Jeff Malec  1:03:04

And it just seems with the concentration, with everything that’s going on, it would become less and less so. But why? Why has it not been unseated as the king there?

Mandy Xu  1:03:12

It’s, I think, the diversity of kind of market participants that we have. We’re able to involve obviously institutional, but also retail. The growth, I mean, a lot of people look at the kind of the explosion in S&P volume in recent years and attribute this to zero DTE, and I strongly push back against that narrative, because I don’t think it’s because of a product that we’re successful in terms of S&P, if you look at, for example, like S&P volumes versus Euro stocks, right, like in the benchmark for European markets, our volume is up 5x versus 2020 Euro stocks volumes is flat, and they have zero DTE as well. So that’s my point. Zero DTE having a specific product is not a guarantee that people will start actually trading it. What you really need is a diversity of market participants that really brings that liquidity to the ecosystem, and that’s what we’ve done, I think, particularly successfully in the US, and I would say particularly successfully around S&P is get that retail involvement in S&P options trading with the success of zero to t options, and kind of teaching retail investors of different use cases for options, it’s not just to speculate on where the market is going to go, but actually, about half the flow that we’re seeing from retail in zero DTE is complex trades, where you know they’re selling spreads, vertical spreads, iron condors, butterflies, etc. for income generation. So, I think this is, you know, part of the, you know, what’s making SPX so successful in recent years,

Jeff Malec  1:04:38

but it’s, but right, they to me, I’d be like, I’m just going to trade Nvidia or Apple or one, one of the single names instead of the S&P, or you have all the foreign European, or right, per your stats, there they’re hedging their Euro stocks with the S&P, so they’re they’re they’re taking on that basis risk voluntarily, which has always been odd to me.

Rob Hocking  1:05:00

Yeah, but the liquidity

Jeff Malec  1:05:01

outweighs the basis risk, I guess, is what you’re saying,

Mandy Xu  1:05:03

exactly, exactly,

Rob Hocking  1:05:04

yeah,

Mandy Xu  1:05:05

but yet to point about, like, you know, the single stock risk relative to kind of the benchmark, the S&P, that’s definitely, I would say, right now top of mind for a lot of investors, and what we’re seeing in the market is while broader S&P volatility has fallen, like single stock volatility has not, and in fact, if you look at our VIX EQ index, which is our VIX for single stocks, right, it’s the average volatility for the top 80 names in the S and P, that is actually at a one year high right now, higher than it was in the peak of the March sell off, so lot of volatility going on at the single stock level, but it hasn’t really translated to higher VIX or higher index volatility, because of the incredible amount of dispersion or low correlation that we’ve seen, right? Like, these stocks are moving on idiosyncratic factors, you know, people picking out, like, the AI winners and losers, people are stocks are moving on earnings, so these are like fundamental risk factors that are driving the market right now, not so much like the broader macro, so I think you know, whenever macro fears resurface, I certainly would expect, you know, more volume going to the index side, but right now I think a lot of people are looking at these, you know, single names and looking at single stock options to express some of those risk factors,

Jeff Malec  1:06:15

and so that’s long the dispersion trade, you deal with a lot of institutionalists are who are basically buying that dispersion trade all day long.

Mandy Xu  1:06:22

Yeah, so I mean, it says trade has done incredibly well. Now, the question is, of course, is the entry point now, and then the kind of outlook going forward, are you going to get rewarded going into this trade today? And I’m more actually inclined to take the other side, because essentially what you’re doing when you go in law on single stocks, so going long dispersion is you’re buying single stock volatility, you’re selling index volatility, and that spreads already at a record high. So, you’re buying something at a record high, hoping that it goes higher. It could play out. I just, you know, I feel like the setup right now, at this point, in terms of entry level, is not compelling, but certainly it’s a trade that has worked really well over the past, let’s call it three four years, for people who’ve been in this trade, got in at better entry levels. It’s carried incredibly well because of what we’ve seen with the AI trade.

Jeff Malec  1:07:21

What’s your quick thoughts on the AI trade? Like, to me, the winners will become right. It’s going to concentrate on a few big winners,

Mandy Xu  1:07:28

exactly, which

Jeff Malec  1:07:28

will keep driving that concentration at the top of the index, and maybe keep driving the dispersion trade. So, who knows?

Mandy Xu  1:07:34

I think it’s going to be a winner-take-all kind of market, and which is why you’re seeing that incredible demand at the single stock level for optionality. People want exposure to those names that they think are going to be the winners in this AI race. You know, my thoughts are in terms of kind of where, where it’s going, or kind of the impact on the market is right now that is the focus, and I think maybe the underpriced risk, if you will, is the more the on the macro side, so everyone right now is kind of dismissing the geopolitical backdrop, dismissing kind of any of the macro concerns out there, and saying that this is an AI market and will remain an AI-driven market for the foreseeable future, and

Jeff Malec  1:08:16

yeah, $100 oil be damned, right,

Mandy Xu  1:08:18

exactly, and the risk is that we have extended period of high oil prices, really dampening kind of consumer sentiment, consumer spending, you know, you could start to get an environment where stocks sell off together, which, you know, hasn’t happened in a while, but you know it could happen certainly if we end up in a more macro driven environment, and that is, I would say, the underpriced risk in the market with correlation levels right now at historic lows,

Jeff Malec  1:08:44

and then one of your recent research pieces was on the bond stock bond correlation that has continued to be terrible in many investors’ eyes, I guess you would put it. So, give us a little bit on that, and then I want to ask, how you come up with these great research pieces, but tell us a little bit about that last one.

Mandy Xu  1:09:00

Yeah, the breakdown in the stock bond correlation, it’s not new, so really happening post Covid 2022 with the Fed hiking rates, and really historically, if you look at, you know, what really drives that stock bond correlation, it’s around inflation, right? So, in periods of high inflation, that correlation goes negative, when periods where disinflation or low inflation is the dominant risk factor, then that, sorry, that the other way around, so that correlation goes negative in the other way, but essentially what it means is that in high inflation periods, fixed income no longer effectively hedges your equity risk, and that is obviously a huge deal for any multi-asset portfolio manager, for anyone who’s relying on your traditional 6040 and of course, with oil prices kind of back at the highs now, you know, inflation is again a key risk factor. So, what we’ve seen this year is that, you know, correlation continued to break down. I would say, you know, in terms of how investors have been navigating this changing paradigm of equity bond. Correlation, I would say the rise in the option-based ETFs is actually a consequence of this breakdown in correlation, because people are looking at more reliable, like alternative hedges, and more reliable hedges, and I would say option-based hedges are one solution, right, because, as we know, with an option contract, right, it pays out contractually based on the price of the underlying, so there is no historical correlation. There’s no scenario where S&P sells off and your S&P put doesn’t pay off. So, I think people are looking at option-based hedges, but the key here with option-based ETFs is that they’ve simplified this process. So, for a typical investor who may not know much about put calls, may not know much about strike prices. How do you roll your hedge? What type of hedge should be implementing right now? They can access all of that via just a ticker, right? So, you know, with the feedback that we’ve heard from, you know, end investors from RIAs who’ve kind of allocated to these strategies to these ETFs, is that, you know, they say this is as easy as buying Apple or buying spy right now, like access to an option-based strategy has become a lot easier. So I think the ETF wrapper, combined with kind of the macro environment where correlation between stocks and bonds have broken down, have kind of created this perfect storm, if you will, for the rise of these strategies.

Jeff Malec  1:11:19

I could argue that the rise of those strategies and private credit and alternative income, all that has dampened the demand for bonds and caused issues on that side. And then give me a quick thing. How do you come up with these great research pieces? Is it all you there in your..

Mandy Xu  1:11:33

no, no, that’s a ton. Now you got a whole

Rob Hocking  1:11:35

team.

Mandy Xu  1:11:36

Yeah, no, we know it’s great. No, we definitely team effort. And I think what’s been great being at the Sibo is just the incredible amount of data that we have, so I work very closely with our data analytics team, we’re very closely with the Sibo Labs, which is our product innovation team, as well as our sales, sales, and marketing folks, as well, to kind of gage, you know, package kind of the data that we have into, you know, things that are relevant for the end customer, and then also you’re working closely with sales in terms of taking the temperature of like what clients are actually interested in, what what is resonating with with customers, so it’s definitely a team effort, not just a one person effort, but in terms of the derivatives market intelligence team, we have three folks based here in New York and one person based in APAC, so we are, we are international, and that is another theme that you know we’re seeing in Sibo is just international demand to trade US products,

Jeff Malec  1:12:30

you guys putting an AI layer on all that data to, like,

Mandy Xu  1:12:33

of course

Jeff Malec  1:12:34

insights out to, yeah,

Mandy Xu  1:12:36

no, no, I would say an AI has been a great productivity tool, definitely, but in terms of the actual writing, it’s still that it’s still human driven right now, but I’m sure you know if you asked me again next year, maybe it will be all AI. I

Jeff Malec  1:12:47

just want it to be like, hey, find some cool thing for me to talk about, hit a button, and it’s like, here’s 10 cool things in the data, then I’ll actually do the writing, but I think eventually you’ll

Mandy Xu  1:12:57

get there. I don’t know if it’s quite there yet, but I think eventually you’ll get there. Yeah, do so

Jeff Malec  1:13:10

you’re here in Chicago Month, and sitting there in New York, so we got to do a little Chicago versus New York debate, so we’ll start with pizza, Chicago and New York, what’s your vote

Mandy Xu  1:13:21

at New York, hands down.

Jeff Malec  1:13:23

Come on. Well, first, let’s preface, you’re in Chicago, probably quite often with headquarters here, right? So you know what you’re talking about from both sides of the

Mandy Xu  1:13:32

aisle. I like deep dish, Chicago style pizza, but in terms of know what I prefer, it would be definitely the New York slice.

Jeff Malec  1:13:39

I, unfortunately, have to agree with you on this one, but have you ever been to Pequods when you’re in Chicago?

Mandy Xu  1:13:44

I don’t think so. All right, next

Jeff Malec  1:13:46

time you’re here, go to Pequods, that might change your mind.

Rob Hocking  1:13:49

Okay.

Jeff Malec  1:13:49

All right. Better looking city.

Mandy Xu  1:13:52

Oh, so I would say New York, the New York skyline is iconic.

Jeff Malec  1:14:00

Okay, here’s my debate with you. Here we have alleys where we put our trash bags.

Mandy Xu  1:14:04

Yes, I know

Jeff Malec  1:14:05

you guys just have your trash. There’s like a $10 million condo up there, and you just have trash bags right in front of the entrance. So I’m gonna say no, that’s Chicago all day.

Mandy Xu  1:14:14

It’s the cleanliness. It definitely is not, you know, where we should be, but the New York skyline, Central Park. I mean, it’s, it’s hard

Rob Hocking  1:14:23

to paint. Yeah,

Jeff Malec  1:14:24

better city will go season by season. Better city in the summer.

Mandy Xu  1:14:29

Oh, I see. Okay, I would say also, I’ll save you time. I’ll say, I’ll say New York for every season except for summer, exactly to the point you made. It’s the smell of all that garbage sitting on the sidewalk when it’s 100 degrees outside. Yeah, it’s not the most pleasant time to be walking around in New York.

Jeff Malec  1:14:47

It makes it that much hotter, right?

Mandy Xu  1:14:50

Exactly.

Jeff Malec  1:14:50

I would agree. I think spring.. I got to say Chicago too. I go summer and spring. I’ll give you fall and winter.

Mandy Xu  1:14:57

Yeah, no, the winter is New York. Although we’ve had a pretty brutal winter this past winter, but yeah, generally speaking, it’s a lot better,

Jeff Malec  1:15:06

better sports, which is tough, because your team’s in the NBA finals, right? As we’re recording,

Mandy Xu  1:15:11

yeah,

Jeff Malec  1:15:12

better sports city,

Mandy Xu  1:15:15

I mean, I say exactly two points, as we’re sitting here recording, this is day game one of the NBA finals, I gotta, I gotta go to New York, but you have the home, you have the

Jeff Malec  1:15:26

Mets and the Jets, which is almost disqualifying, right? Like, they haven’t won anything, and

Mandy Xu  1:15:30

hey, I live in Queens, I gotta stick up for the Mets, but yes, they’ve been on a historic losing run, yeah. And

Jeff Malec  1:15:38

then overall food scene.

Mandy Xu  1:15:42

Oh, are you

Jeff Malec  1:15:42

a foodie or no?

Mandy Xu  1:15:44

I love, yeah, I.. that to me is no doubt. New York,

Jeff Malec  1:15:48

Chicago’s a sneaky underdog. There we got great restaurant,

Mandy Xu  1:15:52

I think. The diversity of cuisines and food that we have, and just like, yeah, I would say New York for this one, for sure. That’s probably a good answer, but all right, Mandy, we’ll leave it there. Thanks so much for coming on. Yeah, thanks for having me. It’s been a pleasure.

Jeff Malec  1:16:12

Okay, that’s it for the pod. Thanks to Rob, thanks to Mandy, thanks Jeff Burger for producing, thanks RCM for sponsoring. Make sure you go check out the new website. We’ll be back next week with a surprise guest to wrap up Chicago Month. See you then. Peace.

RCM Alternatives  1:16:32

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