I’m Afraid There Is a New Fear Index

Exchanges Battle Each Other to Create Competing Fear Index Products, out of fear of losing market share.

Another index product to “measure” investors’ fear?? Are they bats?! As MarketsMuse Chief Curator says, “Yes, Matilda, I’m afraid to say there is yet another new fear index” intended to compete with the now famous VIX product. Dubbed SPYIX (pronounced “Spikes”) by its creators (a joint venture between electronic exchange operator BATS Global Markets and research provider T3Index, the index tracks the price of options linked to the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.

When equities markets are more volatile than ‘normal’–which inevitably means share prices are nose-diving or as my investing grandmother would say “in the midst of a price correction”,  tsuffice to say most investors sh*t the bed with fear when the. Despite the fact that CBOE, owner of the VIX trademark aka Chicago Board Options Exchange Volatility Index says that  “VIX measures expectations for price volatility in the Standard & Poor’s 500 Index during the next 30 days”–that definition is often off-base. Professional options traders will stipulate that VIX is not much more than a real-time diaper check that measures people’s current level of fear, and that index can be 50% lower (or higher) within a matter of hours, once the panic that triggered a spike in the index settles down (or becomes even more magnified thanks to an overnight event that leads investors to liquidate positions the following day).

Here’s the excerpt from Bloomberg LP coverage-

Bats Global Markets Inc. is introducing its own volatility benchmark for U.S. stocks called the Bats-T3 SPY Volatility Index, an attempt to muscle in on CBOE Holdings Inc.’s VIX territory. Dubbed SPYIX (pronounced “Spikes”) by its creators, the index tracks the price of options linked to the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF Trust.

Though they’re calculated in different ways, the indexes are similar enough that the price of the SPYIX should closely resemble the VIX, one of the most closely watched benchmarks in finance.

Creating a successful index could open the door for Bats, which is planning an initial public offering, to create its own options products. The fiercely competitive equity-trading business has compelled exchange operators to seek alternative sources of revenue.

The core of the Bats sales pitch is automation. While trading pits where business is done in person are largely extinct, some options used to calculate the VIX are still transacted by human traders at CBOE’s market in Chicago. The SPYIX is derived from options bought and sold electronically. Bats argues that this means its product would have stayed online on Aug. 24, when CBOE’s index was unavailable for 30 minutes because of enormous market volatility.

“The SPYIX is designed to withstand the most turbulent market conditions,” according to Bats, which developed the new benchmark with T3Index.

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