As financial markets gear up for what is expected to be a highly volatile period around the Nov. 3 U.S. Presidential Election, there is a new way for traders and investors to hedge against market fluctuations: Nasdaq-100 Volatility Index (VOLQ) futures contracts.

CME Group today launched futures based on Nasdaq’s VOLQ, which measures 30-day implied volatility of the Nasdaq-100 Index (NDX). The tech-heavy NDX is led by many of the bellwether high-beta names that have driven the market higher in recent years, such as Apple, Amazon, Microsoft, Facebook, Alphabet, and Tesla.

“VOLQ is a megaphone, broadcasting each day the Nasdaq-100 voice about whether it will have a broad or narrow trading range (up and down) over the next 30 calendar days,” Dan Carrigan, Associate Vice President of North American Markets for Nasdaq, told Markets Media.

Importantly, as a single volatility component index, VOLQ focuses exclusively on the options practitioners, hedgers, and traders use most: at-the-money (ATM) Nasdaq-100 Index options. That differs from the Cboe Volatility Index (VIX), which as a triple volatility component index, includes at-the-money, out-of-the-money, and deep out-of-the-money S&P 500 Index options.

“VOLQ makes it easy for you to understand where volatility performance gains and losses are coming from,” Carrigan said. “If VIX is up five points today, there is no way to dissect what part of volatility is attributed. If VOLQ is up five points today, 100% is attributed to ATM volatility.”

VOLQ was a collaboration between Nasdaq and Scott Nations, inventor of the VolDex methodology, which focuses on at-the-money options. The idea was put out to a group of buy-side investment managers back in the fall of 2017; feedback was overwhelmingly positive, Carrigan said, and it moved forward, through development, to final methodology, and now to a futures launch with CME.

Ultimately, VOLQ enables institutional and retail investors to protect against the kind of market risks that saw stocks drop by about 30% over a five-week period in February and March, amid the gathering storm of COVID-19.

“A pension fund can allocate funds to 10 different advisors to lower investment style risk, but the fund cannot solve for market volatility,” Carrigan said. “If the pension fund wants to hedge a massive increase in volatility, it can use VOLQ futures and one-day down the road options.”

For an institution, VOLQ is a pure play on increases or decreases in volatility via Vega, which is the impact of a single percentage point change in implied volatility on an options position. For a retail investor, VOLQ futures can allow for a longer holding period in underlying NDX stock positions, meaning the investor does not have to sell amid high volatility and owe capital gains taxes.

For all market participants, VOLQ is meant as a complement to VIX, as its design is additive to the growing volatility marketplace.

“We’re pleased to further build on our longstanding, successful relationship with Nasdaq to offer these new futures contracts on the innovative Nasdaq-100 Volatility Index,” Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, said in an August launch announcement. “VOLQ futures respond directly to growing demand for tools to hedge portfolio volatility exposure or trade at-the-money volatility on a leading global benchmark equity index, the Nasdaq-100.”

Going forward, the expectation is for VOLQ volume to ramp up gradually as market participants gain an understanding of its utility. “Adoption will take time as both Nasdaq and CME strive to educate traders on value in using VLQ futures to help manage portfolio risk,” Carrigan said.

Financial markets have held up largely unscathed during the COVID-19 pandemic, helping prevent a health and economic crisis transcend into a financial one. That doesn’t mean there hasn’t been a profound impact on financial services as buy-side and sell-side firms scrambled to maintain service levels while working from home. But has the change been different for each?

Markets Media caught up with Nasser Khodri, Sell-side Group President, Capital Markets at FIS, to discuss the findings of a COVID-19 survey at the height of the great work from home shift.

You surveyed 250 buy-side and sell-side firms collectively, what did you find out?

Overall, the study found that nearly a third (31%) believe a remote, geographically distributed workforce of financial services firms will have a substantial impact on their growth models as they work to assimilate a new way of collaboration. Yet, in spite of this, 35% believe it is likely their organization will still allow remote working to continue for the immediate to longer term future. 

There were differences between the buy-side and sell-side and their appetite to allow their employees to continue working from home.  In particular, the buy-side is less keen on the idea with only 26% planning to let employees do so after Covid-19. In contrast, 42% of sell-side firms are prepared to do this. 

Can you point why exactly there is divergence from the two on the work from home issue? 

It is difficult to pinpoint a definitive reason. Anecdotal evidence suggests the divergence is around structure and culture. Buy-side firms – especially investment teams – tend to be small and very collaborative. They want to be in the same room together. Meanwhile, banks have larger teams – which are harder to bring back in their entirety. They are also more likely to have moved some of their teams offshore, so are more used to ‘remote work’ and have the infrastructure 

Geographically what I have seen is that the response from Asia is different and institutions there are not responding the same way as they are not set up to work from home. There is a culture of working from the office and individual teams are already distributed across numerous countries. Even before a pandemic a team with members in Tokyo, Singapore, Sydney and Hong Kong were doing most of their communication over video chat and email. 

It’s been reported that tech-savvy workers such as millennials and gen-z prefer working from home easier than more senior execs. Is this something your study looked at? 

There is evidence to suggest younger employees – Gen-Z and Gen-X – like the office environment and the interactions with colleagues. In comparison, millennials are happier to maintain current work from home arrangements. Seniors leaders are concerned about the impact these changes have on culture, employee dynamics and productivity. 

The question around productivity is interesting. We are hearing from clients that their meetings have multiplied by a factor of two and there is an opportunistic mindset of let’s connect, and then let’s connect again in the next 48 hours, instead of three weeks’ time.  We are hearing from our clients that productivity is up because they can work through implementation and strategic projects faster. 

How do you see this continuing to evolve as we get further into the pandemic and the subsequent recovery?

I do not think we will ever go back to the setup of 100% office-based work from the pre-pandemic. The leadership at FIS believes the same. Ninety-four percent of our 55,000 employees are working remotely and we are operating as business as usual. There is acceptance here that people do not have to be in the same room to do what we do. This set up allows people to manage their schedule around their lives and what they are doing. There are also benefits to our clients. With remote working arrangements there is more flexibility to service them outside of trading hours.

I believe the question is not whether we can work remotely going forward but whether companies can maintain the same culture that happens face to face. This is the biggest draw for returning to the office for many employees.

Where are firms prioritizing their technological investment?

Our study found an increased focus and investment on cybersecurity following the shift to working from home as fraudsters have a new and tempting field to play in. In addition, nearly half (49%) are prioritizing investment in upgrading trading systems to manage the change to trading from home. Meanwhile, 62% say disruption caused by the pandemic is creating increased demand for cloud systems, even in areas of reluctance such as risk management and post-trade processing. There is also a growing acceptance that more functions, particularly in the back-office, will need to be outsourced to cut costs. 

This article originally ran as FLASH FRIDAY on Traders Magazine. FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura Company.

With a month to go until the 2020 U.S. Presidential Election, the statistical model on FiveThirtyEight.com gives Democratic challenger Joe Biden an 80% chance to unseat Republican incumbent Donald Trump.  

Market participants say whoever wins, there’s about a 100% chance that trading volumes and volatility will increase sharply at some point around the election, as institutional investment managers add and/or reduce risk and reassess sector outlooks. A spike in activity would be exacerbated and extended if election-night results are contested.  

Every election year has its own unique circumstances. 2020 seems to present more of a risk for heaving volatility, but at the same time, operators of exchanges and trading platforms, order handlers, and trading technologists have the advantage of surviving what has been a highly volatile year so far, with market structure intact.  

“The decades-long trend has been to see increased market fluctuations during October and November of election years. The odds suggest that this occurs again this year,” said Frank Cappelleri, Executive Director and Chief Market Technician at Instinet.

“We should expect the 2020 trend of increased volume, heightened volatility and sharp reversals to continue,” Cappelleri said. “The silver lining is that traders and trading systems have successfully dealt with these challenges for six months already.”

The real crucible of 2020 to-date came in February and March, when the first COVID-19 lockdowns started and there was little to no clarity on the trajectory of the virus or its economic damage. Even with massive trading-volume increases in equities, fixed income and derivatives markets, and traders around the world working from home, there were effectively no significant institutional market disruptions or outages. 

“Never before had so many sell-side desks relied on trading systems while working from home,” Cappelleri said. “By most counts, the industry fared well despite the unconventional circumstances.”  

The experience should help keep markets running smoothly. “As the election looms, while more workers have returned to the office, the majority are still at home,” Cappelleri said. “Having to trade remotely during another volatile period will not present a completely new challenge this time.” 

Four years ago, futures markets fell sharply on election night when it became clear that Trump would unexpectedly win, but markets quickly rebounded and sustained further gains over the subsequent weeks and months. The 2016 election “heavily stressed trading systems.” 

This year, infrastructure providers such as exchanges, trade handlers and order routers can maximize operational resilience by one, knowing how many trades their systems can handle in a day, and two, identifying the specific pinch points and bottlenecks in their systems.

That’s according to Guy Warren, CEO of ITRS Group, who said from there, it’s all about modeling and stress-testing worst-case scenarios. Said Warren: “As we get closer to the election, the financial sector is putting more time into their investment strategies, but alongside this they must also invest time and money into ensuring their systems can cope with high levels of volatility.”   

Dear Women in Finance and WIF Supporters,

As we collectively strive forward to close out what has been an unprecedented year of global disruption and turmoil, our hearts and minds go out to everyone affected by COVID-19, and we offer our sincerest thanks and respect to all those who stepped up to selflessly confront the pandemic head on.

Amid this most challenging of backdrops, Markets Media Group is proud to have made the decision very early on to continue and further expand our global Women in Finance programs and Diversity & Inclusion initiatives. In fact, we felt that it was more important than ever.

Of course, it is with great disappointment that we will not be able to facilitate our usual in-person gatherings and galas during this awards season ‘with a difference’, but nonetheless we vigorously forge ahead to recognize excellence in our financial markets and the global trading community.

Last week, in collaboration with our GlobalTrading Journal, we virtually hosted the second annual Women in Finance Asia Awards event to recognize and celebrate outstanding leaders and rising stars alike across Asia-Pacific. Keynoted by Blackrock’s Chair and Head of Asia-Pacific, Dr Geraldine Buckingham, the event was a smashing success and we would like to extend our gratitude to all the sponsors, presenters and the Advisory Board and we heartily congratulate all the winners.

Upcoming we look forward to the inaugural European Women in Finance virtual awards ceremony which is being spearheaded by our team in Europe with Best Execution and theDESK publications. We are very pleased to have publicly announced what we are calling the ‘short-long list’ of 100 incredible individuals. Please register for the event on Oct. 29.

Finally, we come to our largest event of the year, the sixth annual Women in Finance Awards historically hosted in New York City by Markets Media and Traders Magazine. Over the past six years we have bestowed close to two hundred individual awards to extraordinary women in financial markets and thankfully there is no end in sight. With the help of all of you and our amazing advisory board, we plan to put on a great show but more importantly continue with our mission to recognize and celebrate women in our markets to end 2020 on the highest of possible notes. Naturally, the event will be virtual. Please help us in this endeavor by nominating colleagues, counterparts, competitors, mentors and mentees and friends.

Lastly, I would like to thank my colleagues and their families at the MMG family without whom none of this would be possible. They truly are a highly dedicated and experienced team of professionals.

Stay well everyone.

Mohan Virdee,

CEO

By Sylvain Thieullent, CEO, Horizon Software

The crisis has pushed banking IT systems to their very limit. And, although the dust has settled, it is now that the cracks are beginning to show and we begin to see which banks are just coping, and which are thriving. The key to differentiator lies in how the firm has approached software implementation and whether they have a had holistic cross-business plan. For those that have not yet picked a path, the current crisis has just made their decision for them.  

Banking success is now built on technology. The last few years has seen a gradual shift in the value chain, with more importance placed on systems over people. Gone are the days of the golden wonder trader earning billions. Now, it’s about the trading strategy; the best algorithm or software. And, as such, banks have been busy building systems and platforms, with some making huge investments into technology. 

This recognition kicked off the familiar build vs buy debate, with many banks at least attempting to build internally. However, for most banks, the approach has been flawed. This is because it has historically been very difficult for IT departments to have a budget maintained to retain talent and keep projects moving forward. R&D has not been a priority, and technology was not previously seen as a core asset, but rather a commodity. The focus has tended to be on short-term ROI, and banks are reluctant to commit cash for three or four years. 

For example, a bank may decide to build a new platform and commit capital to an 18-month implementation plan. But then, in reality, they discover it will take them 5 years. So, what happens when the budget runs out after 18 months? All too often, the project is put on standby and the teams designing the systems are disbanded until more budget can be negotiated internally.

On top of this, two years later, there may well be new management, who may want to take a different direction, and the whole process starts again. There are even cases where a system has been built by a team of talented designers and, once the project is completed, the bank cuts the budget for those who know how to run the technology. It can be a web of mismanagement and a serious drain on cash. 

This lack of commitment has just been greatly exacerbated by the current crisis. Budgets are about to be slashed across banks and we already know that most major medium- and long-term projects have been put on standby as banks focus on survival. And in some cases, operating teams are depleted as lay-offs are made for the banks that have taken big hits to their bottom lines. This means it’s now impossible for IT departments to get the commitment they need.

Whether a bank uses its IT department or outsources, it needs consistency. Realistically, banks should be thinking 10 years down the line and should have a transformation plan to match. It’s true that many would argue a bank needs to be flexible, but this is not to be confused with exclusively committing to short-term plans. The flexibility must be within a clear direction and it requires the management to commit to a plan that extends beyond their period of leadership. 

Those who have built their systems over last 5 years will be in a good position. But for those who have not, the IT department is now extremely unlikely to be able to secure budget for any further projects. So, if a bank is not already far through the process of building new systems, they will find their only option is to buy. 

That said, simply buying off-the-shelf software is no longer compatible with the challenges of the modern fast-paced environment. Software needs to be tailored to specific requirements and updates need to be regular. Firms also increasingly need to have fast time to market, reduced running costs, lower operational risk and, for trading firms, automation. These challenges can only be met by combining technology with the ability to automate and customise systems, while managing infrastructure and services for clients. Ultimately, the debate has shifted: instead of build or buy, firms should buy, then build.