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CBOE: Industry Trends and the VIX

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Shares of CBOE Holdings (CBOE) drifted off all-time highs Friday after the owner of the Chicago Board Options Exchange reported a substantial decline in trading activity for February 2013. Volumes were down 18% from a year ago. Shares, which notched record highs of more than $36 on the last day of February, slipped 0.8% when the results were announced on March 1. Still, the stock is up more than 46% since hitting 52-week lows in mid-May. The surge in the stock comes as the exchange faces an onslaught in competition from other exchanges and despite challenging conditions in the options industry today.

CBOE said Friday that average daily options volumes dropped to 3.95 million contracts in February 2013. While that is up is up from 3.85 million in January, it represents a decline from 4.84 million a year ago. CBOE market share of the total US listed options market was 23.4%, from 27.7% a year earlier.

The drop in trading activity at the CBOE is part of an industry wide trend and also due to increased competition. CBOE is the oldest, but only one of 11 different exchanges that lists puts and calls today. We can see from the table below (from the Options Clearing Corporation - OCC) that CBOE captured the most market share Friday, but ARCA (formerly PCoast), AMEX, ISE, and PHLX are important players in the industry as well. The options market is fragmented and a variety of different exchanges compete with CBOE for options order flow today.


Options Exchange Market Share (3/1/2013)

Total trading volume across the entire industry declined by a more modest 8% in February 2013, according to OCC. Total volume was 325 million contracts, compared to 352 million last year. Average daily volume in the US listed options market was 16.9 million, and about 3% lower compared to February 2012. Year-to-date options trading volume is 682 million contracts and down 0.42% from a year ago.

So, although the equity market continued its surge to multi-year highs in February, overall options volume declined a bit from 2012. Meanwhile, CBOE Volatility Index (VIX) dropped to five year lows of 12.08 last month as well. The low levels of volatility might be taking a toll on trading volumes, as some investors are less motivated to buy puts for portfolio protection amid very quiet market conditions or to write puts and calls when vols are so low (cheap). However, with the recent two-week 28% jump in VIX, we might see a bit more volatility in March and, if so, a pickup of activity in the options pits on CBOE as well.

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