Transcription of Finance News Network Interview with ASX Limited (ASX:ASX) Product Manager for A-VIX, Brian GoodmanLelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from the operator of the Australian Securities Exchange, ASX Limited
(ASX:ASX), is its Product Manager for A-VIX, Brian Goodman. Brian welcome to FNN.
Brian Goodman: Thank you.
Lelde Smits: In a first for the local market the ASX has just launched a contract based on market volatility, called the S&P/ASX 200 VIX Futures. Brian, what was the motivation behind the move?
Brian Goodman: Well we launched the S&P/ASX 200 VIX index, the underlying index, at the end of 2010. So the S&P/ASX 200 VIX is a bit of a long name, so we’ve colloquialised that down to the Australian VIX or the A-VIX. Now as soon as we launched that underlying index we started to get demand from customers for a futures contract over that index. So the motivation was really a response to customer demand.
Lelde Smits: Market volatility is a hot topic for traders and can already be tracked through the S&P/ASX 200 VIX index. How does a volatility futures contract work?
Brian Goodman: If we wind back and just look at how the underlying index works first. So the A-VIX index that actually looks at prices for options
over the broad market index. So it looks at option prices for the S&P/ASX 200 and a reverse engineers the volatility, that’s sitting in those option prices. So the A-VIX index then gives us a gauge, or a sense of how much risk and uncertainty market participants are expecting to see in the equity market, over the near term. The VIX Future itself is just an index based future, in the same way that the SPI Futures is an index based future, over the S&P/ASX 200 index. The A-VIX Future will just settle against the A-VIX index on the expiry date.
Lelde Smits: If we can look closer at the A-VIX contract, what is it based on and what is the minimum dollar value per tick?
Brian Goodman: So we’ve talked about the futures contract and the fact that it’s based on the A-VIX index. The contract design itself is very similar to CBOE’s [Chicago Board Options Exchange] VIX Futures. So at one big point, its $1,000, so at the moment the index is around 12 or 13. So if the November futures were to trade at 13, it’s a notional value of $13,000, but the minimum tick is .05 which translates to a $50 tick.
Lelde Smits: How many contracts are you listing at this stage and do you have any market makers in the contract?
Brian Goodman: We have market makers in the contract. We have two market makers and they are making continuous prices in the two contract months we have listed. So at the moment we have a November and December contract month listed, we’ll always have the next two calendar months listed. So when November expires, we’ll have a December and January contract month listed.
Lelde Smits: The VIX index is commonly referred to as the “fear index” from which sentiment is gauged through see-saw movements on the market. But Brian, to what extent do you believe fear and volatility are related?
Brian Goodman: I think the VIX sometimes gets called, or the A-VIX sometimes, gets called the fear index because volatility goes up, investors are perceived to be quite fearful. Similarly volatility goes down and investors are perceived to be more confident. If we think about what the A-VIX is really doing, in terms of giving us a gauge of perceived levels of risk and uncertainty in the market, then I think I’d make an argument that uncertainty and fear aren’t necessarily the same thing.
Lelde Smits: The benchmark S&P/ASX 200 index has traded between 4,334 and 5,402 over the past year. How has this translated in terms of volatility on the S&P/ASX VIX index?
Brian Goodman: For the past 12 months, the VIX has actually been at relatively low levels to its previous history. So for the past 12 months it’s really been mostly below 20, which is quite low. And at the same time, we’ve seen the local share market rally from around 4,400 to 5,400. So that rally that we’ve seen in the share market has really been accompanied by low levels of VIX, or low levels of volatility. And that’s really what we’d expect to see. That share market rally should really be underpinned by low levels of uncertainty and greater levels of investor confidence.
Lelde Smits: Finally Brian, the Chicago Board Options Exchange’s VIX options and futures contracts in America, recorded record volumes this year. What are your expectations for the S&P/ASX 200 VIX Futures volumes over the following year?
Brian Goodman: Without wanting to put a number next to our expectations for the contract - But if we consider the demand we had for this product, the growth and the volumes that we’re seeing in the US VIX, and the fact that the second day after we launched the contract, we saw a trade go through and on day three of the contract we saw some trades go through, and, a number of customer orders and customer interest we’re seeing - That bodes very well for the future of the contract.
Lelde Smits: Brian Goodman, thank you for introducing ASX’s first volatility futures contract and all the best for the traders who take it on.
Brian Goodman: Thank you very much.
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