Interview: SIG Susquehanna on European Volatility & VSTOXX® 

SIG Susquehanna is a market maker in several markets around the world. How do you decide which market you participate in?

We are always open to trading new products. To filter for the most appropriate markets for us to enter we need to ensure

• (i) that the product has a promising source of demand to trade and
• (ii) that we are confident in our ability to price the product competitively.

VSTOXX® futures and options tick both of these boxes as there is a lot of natural demand for volatility exposure from various market participants, and since we already have a very large presence in trading European volatility through options, the VSTOXX® is a natural fit for us.

What markets are you currently active in and what is the role of the sales desk?

In the options space we make markets on virtually every name in Europe – approximately 800 in total. On the ETF side we have similar coverage, trading over 2500 individual root listings. We have worked with Eurex on the launch of multiple new markets, such as Weekly options, ETF options and options on MSCI indices.  We will continue to support Eurex and other exchanges with any product launches where we see potential.

The options sales desk was set up to allow clients access our liquidity directly rather than trading with us on screen, IDB or through a bank.  We make direct prices for a number of Asset Managers, Pension Funds, Hedge Funds and Bank Sales Desks in this capacity.

Trading new products like weeklies and VSTOXX® options is advantageous for our sales desk as it strengthens the case for a new client to come directly to us for pricing.

When did you start trading volatility and how much of a presence do you have in this space?

SIG Susquehanna has a very long history in trading volatility, having been originally set up as a specialist options trading firm in 1987 when options were new to the market. Our European options desk started trading in 2005 and since then we have grown to be one of the largest participants in the market – last year we traded 11% of the total volume traded in listed (equity & index) options in Europe.

We started market making actual volatility (VSTOXX®) products in Europe last year and we have already established a significant presence. In H2 2016 we ranked 1^st in volume on Eurex for VSTOXX® futures and options.

What is specific to European volatility markets?

In recent years we have seen several Euro specific market shocks. With Brexit and the rise of Nationalist parties in Europe this trend looks set to strengthen. The VSTOXX®/VIX spread has averaged around 6 for the last 5 years but has increased to levels >10 a number of times on various bearish Euro headlines, and more recently close to 18 during Brexit week. It is worth noting that these disconnects are short lived; since 2007 the spread has been above 11 only 3% of the time.

The liquidity on Eurex volatility Index -VSTOXX®- has experienced double digit growth over the last few years. How do you explain this growing interest for European volatility?

Following from above, the increasing dislocation between the US and Europe in terms of events causing volatility spikes is leading more customers to trade European volatility as a separate asset class. Also, as more market makers get involved in providing liquidity this creates a virtuous cycle. The message we hear from quite a few Global Macro funds is that they trade US volatility, and would like to trade European volatility if the liquidity was there. Thus, increased liquidity should fuel increased demand. Along this vein, it is important to spread the message that screens do not reflect the full liquidity available, and that coming directly to a market maker can give access to more size and better pricing.

Another virtuous cycle is created as more participants trade the product, leading to more differing opinions resulting in more trading opportunities.

As of Feb 1^st 2017 VSTOXX® options are CFTC certified (allowing wider participation from US clients) and we expect this to boost trading volumes even further as new sources of demand are opened up.

What kind of opportunities can be captured in European Volatility?

One trade we see a lot of clients put on is the VSTOXX®/VIX spread, giving them exposure to European volatility shocks funded by selling US volatility.

Another simple trade we see from clients is holding short futures (or short deltas through options) to collect the carry when the volatility curve is upward sloping.

However, some of the largest and most notable flow we tend to see is around European events. One example of this was a buyer of 20k Dec-16 17 Puts ahead of the Italian Referendum in December who would have made 2.30 per option, unhedged.

What kind of firms do you see active in V2X products, and what kind of flows are you seeing at present?

We see VSTOXX® products used in a variety of ways. Hedge funds will use options and futures to get exposure to events, as outlined above, or to take opinions on the shape of the volatility curve. Asset managers can often have a systematic short volatility component to their portfolio, and we see a number of them using VSTOXX® futures to put this on. We also see several exotics/ structured products desks at banks who use VSTOXX® futures as a clean way of hedging their residual volatility exposure.

Outside of the regular systematic flow, we are seeing VSTOXX® April & May becoming an area of interest for the market with the French Elections a potential source of major volatility.  Flow we have seen up to this point has been buyers of futures and buyers of vol with options deltas more mixed.