The Derivative - Is there room for a VIX competitor, SPIKES founder Simon Ho sure thinks so.

Episode Date: October 6, 2022

How do you create a new futures contract?  You need an exchange. And you need something that changes in price, like a commodity market – or a financial index. This week we're diving deep into crafting an index with T3 Index's founder and CEO, Simon Ho. Simon is no stranger to the vol space, and he has worked in the options industry for over 20 years in trading, product innovation, and risk management roles. In this episode, Simon and Jeff touch base on the various unique index products at T3, like YLD Vol, ETH Vol, and the VIX competitor SPIKES.  They talk through just how SPIKES differs from the VIX, the unusual behavior currently playing out in stock index volatility, the futures, options and ETFs based on SPIKES, and so much more. Plus, Simon gives his hottest takes. Will you be tuning in? SEND IT! Chapters: 00:00-02:05 = Intro 02:06-11:05 = A robust background to crafting a robust index 11:06-15:53 = Helping hedge funds generate alpha & Tail risk events 15:54-25:38 = It's Coke - Here's Pepsi: Improving on VIX with SPIKES 25:39-35:37 = The unusual behavior of the current state of volatility 35:38-43:41 = T3 Index, MIAX & skew indexes 43:42-55:03 = SPIKES stress test, the creation of the VOL index & Hottest take Show Notes: Follow along with Simon on Twitter @t3index and for more information on T3 Index visit t3index.com and check out MIAX at miaxoptions.com Don't forget to subscribe to The Derivative, follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy day after James Bond day, everyone. There were six Bond actors, I don't count the 67 Casino Royale movie, in Her Majesty's Secret Service over 60 years, and all of them were in the duty of the same majesty. Think about that.

It's also one of my favorite Bond movies on Her Majesty's Secret Service, along with You Only Live Twice, Spy Who Loved Me, Goldeneye, and Skyfall, picking one from each actor. Anyway, this isn't a movie pod. It's a hedge fund pod. And we've got Michael Harris from one from each actor. Anyway, this isn't a movie pod. It's a hedge fund pod. And we've got Michael Harris from one of the best this year, Quest Partners, coming on next

week with Caitlin Cook and Macro Elf also getting scheduled. So go subscribe to be the first to hear from those when they drop. On to this episode where we've got Simon Ho, the founder and CEO at T3 Index, which designs unique index products like YieldVol, ETHVol, and the Equity Index Vol Tracking Index, Spikes. We get into how Spikes differs from the VIX, the futures options and ETFs based on Spikes, and how hard it is to compete with a new futures contract where liquidity and scale trump cost and structure until enough liquidity and scale moves over. It's a chicken or the egg problem. Send it. This episode is brought to you by RCM's... No, I'm going back into movie mode. This episode is brought to you by RCM's definitive list of the best investing

movies. Blog post we did back in 2019. Go Google that, definitive list, best investing movies, and let us know if you agree or don't with the list. And now back to the show. All right, Simon, how are you? I'm very good. Thank you. Thank you for having me having me no worries and where are you lovely australia yes i'm based in sydney australia so yeah you didn't give me the background i want to see the ocean or something i thought that would be corny it would but uh where in sydney right right downtown i only know like Manly Beach and downtown. Oh, that's funny.

So I live at Manly. Oh, nice. Yeah, it's a nice little spot. It's only about 20 paces from the beach, and it's probably one of Australia's best beaches, I think. Yeah, I'd agree with that. I got to get back. I was out there, did Surfers Paradise, Fremantle, and Sydney. So I need to do Melbourne still and some of the rest of it.

And New Zealand. Never done New Zealand. Oh, yeah. New Zealand's awesome. I know. I suspect. So to have you on, I'm going to talk about spikes, but give us a little background. We were talking offline.

You've been doing all sorts of vol since the mid-90s. So kind of where'd you get your start in the vol space and how's how's it evolved over the years yeah sure so um i i fell in love when i first saw people doing fx options trading because i thought wow you can actually trade volatility this is a new dimension that i didn't even think about, you know, and so that really pushed me to sort of delve into it a little bit more directly. And so then where, as you were a trader somewhere, where did you see that? Yeah, actually, that's a good point. So I was doing an intern with a bank in Sydney and it was the JP Morgan.

And that's where I got exposure to the concept of trading volatility as an asset class. And I thought it was freakishly interesting. And frankly, I still feel that way today, to be honest with you. I think it's probably the only thing that I really ever want to do is to be involved in this kind of stuff. And so they were traders at the bank, trading on the bank desk, doing vol hedging or outright trying to make money for a prop desk or whatnot? Okay, so initially I came on as a trainee, wanted to work on the FX options desk, but Sydney, the Sydney office didn't have the ability for me to fill such a role. So they moved me to Singapore, which was the hub at that time for JP Morgan in Asia.

And so that's where I cut my teeth, so to speak, when it comes to volatility. So ultimately, I ended up running that business for some time, moved to Merrill Lynch in New York, because I am also enamored with New York and I loved it. And so I thought, oh, I'll give an opportunity to go there. Why not? So I did that. Also then moved to London for a little while to work for Goldman Sachs, where I was in charge of the FX options for a while. And then from there, we sort of stepped out. So now we're sort of getting into the 2000s and I was no longer, I'd done a lot of what I wanted to do in the FX options trading space.

And so we then changed tact somewhat and we started to think about, so I've got a very good team who are, there are some people here who are just ridiculously intelligent. And so we wanted to put our minds towards creating new, better instruments for the market to use. And so, for example, that was the genesis for the creation of Spikes. So I had been trading prior to Spikes' arrival. I'd been a longtime trader of VIX products. And I thought it was the bee's knees. I thought it was fantastic. This is the best thing

you could possibly do. Over time, we decided that, well, why don't we do a version of our own? Because there are, from our point of view at least, there are some shortcomings that could be addressed. And we kind of felt that it was a bit like the Pepsi to the Coke. Why couldn't you have something that was a competitor to that rather than it being the sole provider of volatility derivatives? So that's where we spent a lot of our time and we wanted to refine it and we wanted to make improvements in the way that it was crafted.

And I think we achieved that. Do you ever lament that there wasn't like a VIX type product on FX, right? So you had to trade the actual instruments to get the volatility exposure in the FX contracts? Yeah, actually, we did. Did you kind of create a synthetic one, for lack of a better word? Yeah, exactly. So we would obviously have to figure out what the hedge would be, but effectively, we could offer those types of things to clients.

Now, it's a bit different in that one's a listed product and therefore that attracts sort of greater volume, whereas these other ones are a bit more ad hoc, you know, and they're designer things because someone might want a knockout at a particular level or something like that. So the FX stuff that we did was certainly much more modular than it is in the listed space. Yeah, that's a whole nother world.

We'll leave for another time, but of the knock-ins and knock-outs, especially over in Asia. And I'll just quickly ask you of what your view is. Is that a big outlier possible event, downside event waiting to happen when a lot of those, right? You hear some people say like there's huge,

if some of these knockouts get hit, you're going to have huge selling out of Asia. Other people are saying it's the banks have it hedged it's fine it's not going to be a big problem uh so yeah curious on your views of that even though we're going on a bit of a tangent well no no that's all right i mean you're you're digging into some pretty interesting stuff um so the the i had um there is a very massive customer in Singapore who will not be named, but they, we did a pretty big trade for them. And thankfully it sort of turned out all right. But that was something that actually was quite scary because the size of the thing was pretty massive. And as you pointed out, there are knockouts and stuff.

And in this particular instance that I'm talking about, there was a very big knockout and um ultimately it did get knocked out and of course at that point you've got to scramble to get all sorts of hedges together i mean you're doing it prior to that obviously yeah we're aware that something like this can happen so but it's just one of those things where you typically you hope it doesn't happen um Obviously it depends which side of the trade you're on, but no, that was kind of some of the more hairy things that you could get in the OTC space that you're referring to, you know, these are quite difficult to manage. They're basically massively short gamma.

So as it gets closer to that knockout, they have to scramble to hedge it more and more. Exactly. Yes. And then I always get confused. Is the bank short the game or the client oh it depends which yeah which way they go yeah the bank's probably both they know whatever they want to sell whatever the clients want to buy they'll take the other side exactly

um and then you mentioned all those wonderful places so which which was your favorite sydney singapore new york london uh you know each one of them has their own charm like when i went to singapore i was adamant that i oh no singapore's not that great but i had a really good time there to be honest i mean it was it was very good and frankly that's where i cut my teeth trading options um and that's where i learned a lot so i i really did appreciate that opportunity um i i really look i enjoyed jp morgan as well very good organization but i think um the best fun that i had i suppose um was probably at goldman sachs in london i i the team there was extremely good and i learned quite a lot from them uh did you run into charlie magara over there

i think he he was london goldman head of commodities around the same time ah right yes yes yes so i know his name but yeah i might be mispronouncing it he was here on the pot and then whenever i have a goldman person on former goldman i ask him are you which camper unit was it's an okay company or the vampire squid just make money at it, no matter the consequences, right? Which has been portrayed in the media as like, they'll do anything to make a buck. No, I certainly did not have that experience. I can tell you that for sure. We had a, frankly, a crack team.

I think that everybody had a very good role to play and it was very synergistic. And yeah, I couldn't fault it. And I didn't buy into that squid thing. had a very good role to play and it was very synergistic um and yeah i know there's those i couldn't fault it now and i i didn't buy into that squid thing i didn't see anything that was you know odd or that different um i felt like um the caliber of the folks there was was very high and that rubbed off on everybody so i think it was very positive positive. So then you start moving into offering some of your volatility expertise to some different hedge funds? Yes, exactly. So what we wanted to do is expand the realm of our activity. And one of those things was to help hedge funds

to either generate alpha, that's one thing. And the other thing that was a by-product of that as well was actually to then start thinking about doing tail risk hedging. So obviously a little bit, they're different cohorts, but nevertheless, we ended up doing both of them. So now it wasn't hugely long-lived because markets started to

simmer down. And from that point on, you know, these things, earthquakes don't happen all that often. And so you have to wait for the specific period. And so we did very well for our clients. But from there was then we started turning our attention towards the creation of these new indices and that was post uh internet bust or post financial crisis like when when people were wanting to tail risk and stuff yeah so certainly after 2008 and then we were we were we were very well versed uh when it actually happened in 2018, for example, when that disaster happened. But that's interesting, all this to me, right? Everyone rushed in after the storm, wanted all these products, and then spent two, three years with the exposure and then started to give up. CalPERS famously here in the US right before COVID got rid of their tail protection.

So yeah, how do you view that of people that's just human nature or you think there's problems inherent in the products that they're investing in that doesn't allow them to stick with them? Oh, that's a vexing question. Yeah, no easy answer to that. Yeah, that's right. I think there are certain strategies that one can deploy. We have one in particular that we kind of like, but obviously it's not, you're not going to have the same remedy for everything, right? But by definition, you're going to have to sort of tailor it to some degree. So yeah, we did that and um it worked out pretty well very well for us a

couple of times already um so but again it's the sort of thing that it's not like i would necessarily go to that if the circumstances were not warranting it if you know what i mean but yeah so we we we actually were the some of the proponents in involved in the one by two strategies and um those were particularly good. And the timing as it happened was particularly good. Dig into the one by two strategies for the listeners, in case I don't know what that means. Sure. So it's a strategy that is designed to help with this tail risk events, i.e. a very large screaming high VIX slash spike price.

So if volatility is rising a lot, what you can do, if you're expecting that to happen, you could sell one option and buy two options. So effectively, what you're trying to do here is to not bleed away too much carry. But if something were to happen you end up you end up net long one volatility obviously you would do more than just one but like this is just for scenario um work basis um and then you end up with effectively blue sky and then you have to just make a decision as to when you think you're going to get out because obviously it doesn't go up forever so that's the kind of strategy that we've employed um pretty well over the past couple of years and what what my naively

i'm like why not just buy the one contract then instead of doing the spread oh the answer would be because 90 of the time that you don't get to the other two right exactly that's exactly right so that's why you put that program together and it it means that you're not going to get as hurt from the decay and all that kind of stuff if you do it in that fashion. Have you seen that generally be at zero cost or it's a slight cost? It depends on how aggressive you are at the beginning, like how you want to stack it. So, you know, some people are typically it's one by two. But, you know, you can always change those ratios and, you know, define it a little bit more based on what your thoughts may be. But typically it's one by two. And then the danger is you're kind of short the belly, right? If it rallies above the short strike, but not it's one by two. And then the danger is you're kind of short the belly,

right? If it rallies above the short strike, but not enough to spike the long strikes. Exactly. That's right. We mentioned spikes. Let's dig into the spikes index and what you've done there. And I saw you do VIX slash spikes. That's going to be hard for me. So I'll try and stick on spikes here instead of VIX. But let's start there. Everyone thinks of VIX as this thing that came out of the earth and it's just a thing

that is in the market, but it's an actual trademarked name, right? Yes. Yeah. So people have it synonymous with volatility, but it's actually just a product that measures volatility. So it's Coke and you're saying, Hey, here's Pepsi. Yeah, exactly. That was kind of the, you know, banal rationale for it. I mean, it's, it's not going to necessarily be like that, but when, when we were thinking about it, you know, as I said, I had been a long time trader of VIX anyway, just because I love this dimension of volatility.

I can't get enough of it. And so we kind of thought, well, maybe there are certain things that we can improve upon on this. Now, clearly, you know, VIX is a fantastic brand. It's been around for a long time. And so as the second comer, you're obviously you've got a lot more barriers to entry because, you know, people know the product and they're comfortable with it. And so it's quite difficult for us. And that's hence why I refer to the Pepsi and the Coke

because they're both kind of very similar, but, you know, people have preferences for one or the other. So we decided that we would go ahead and try and improve upon things. So, for example, VIX has in the past had some issues whereby if on the continuum of all of the strikes, and they're usually about 200 strikes or so that go into making the index. And if you're missing one single option, then you have a bit of a break. You can't actually publish the value. So we addressed for that. And so ever since 2017, when we went live, there has not been a single moment in time where our index hasn't been up. Whereas occasionally that happens in the VIX. Now I'm not poo-pooing the VIX here. I'm just simply casting one against the other. And we obviously have the benefit of hindsight too, right?

So when they did it, so. And what does that look like? There's 200 strikes and it's the 30 delta, right? It's basically some out of the money thing that nobody has traded there. So there's no price for it. Exactly. That's right.

And that can happen quite regularly. It seems hard to believe on the SPX of like, no, isn't everyone in the world trading all the strikes? But I guess not. Yeah. Yeah. Look, I'm sure that they've put things in place to remedy that kind of stuff. But certainly when we were thinking about it originally, that was the case. And frankly, as I said, it still does happen. It happens at a lower frequency these days than it did, but for a time it used to quite regularly. So that was a shortcoming. And what we did then is we created a new mathematical device which basically enabled us to do it without having any such things.

And as I said, since 2017, it has been smooth sailing the whole time. So that has been something that has been pretty good. And the other thing about it too, has enabled us to calculate or disseminate the prices of our spikes index at a hundred millisecond intervals, whereas it's 15 seconds in VIX. Now that's a gargantuan difference, right? Now you might just say, well, i can't really use that but frankly some people can there must be high frequency folks who would like to look at that kind of stuff right

so we wanted to do things to try and differentiate ourselves obviously from vix but also you know the good parts of vix you know obviously we try to replicate and do at least as well if not better 100 milliseconds what that's a thousandth of a second oh no 100 milliseconds or it's yeah a tenth of a second um someone someone can put us in the comments check our math i don't know if i know how to how time math works improving that we're not high frequency traders where that would be right in our lingo right um yeah and so going back to just the calculation and it right if if those can have a missing print and not print the vix can't you also if it's super thin in some of those strikes right people

could game the game the index calculation ah okay i'm very glad you asked that and yeah and how do you guys handle that yeah so so basically we created the new math that i was talking about there um and which basically means that the last price is the most important price if there is some movement then you'll move to the new one but so what that means is that we are never vulnerable to the fact yeah that um there's always options that are there to complete that entire uh spectrum of things so we never have an outage because we always have those options uh have those um had those options available now um another thing also is that it's 100 milliseconds i'm so sorry that's um that was my my bad so that's actually printed at 100 millisecond increments so yeah so basically we have this thing um called price dragging and if there is no update in one of the options let's say you know 200 plus options that

go into this then you would leave it alone and only if only if it is actually higher or lower, would we then change it? And that gives us the, I guess, the bedrock for this thing not blowing up or not giving the correct values, essentially. That makes sense. Yeah, like sort of a weighted average of those. So the newest price is weighted in

or it has full priority over the past prices? It does have full priority only until the price has moved higher or lower, in which case then that becomes the latest point that will be consumed in the index. Got it. So we've got the math for missing option prices. We've got the time is better. What else separates it? Well, from a pricing point of view, we have been offering for the longest time zero clearing fees. Now, that's pretty amazing, especially when you consider that VIX is a very high priced product, right?

Let's back up a real quick second. So the Spikes Index lives on its own. It's calculated every day by an index provider, right? And then there's now futures on the Spike Index, right? So we're talking two separate things. There's the index itself and then futures, Spikes Futures, which is MEACS, right? Correct, yeah. So MEACS is the exchange that we work with and um yes yep no problem um and so yeah i mean so you're saying in the pricing

wise the index pricing doesn't matter index is an index but you can't trade the vix anyway so there's no pricing on the index the The futures is where the pricing comes in. So no clearing fees for now, no exchange fees, I would call them. And then eventually that'll change as it gets more popular, but the goal would be for them to keep it below the SIBO, I guess.

Yeah, I mean, as the second comer to the market, as we spoke about earlier, they have a branding advantage because they've been doing the thing longer, right? So there's that. We need to impress upon people that we have something here that is equivalent or better than that which exists today. And so there are a number of features that we have that will actually answer that question. And so at the moment, we're doing it with zero fees because obviously we're trying to attract people to come in.

But one thing that the customers or the people who are listening here should know is that the correlation between Spikes and VIX is 99.9% correlated. So effectively, they are the same thing. But obviously, because we're a second mover, we need to prove to people that this thing actually does what it says, despite the fact that it's 99.9%, people need to see that for themselves. And how do you achieve that without replicating exactly what they're doing how are you achieving that versus what they're doing is from my understanding spx versus spy

that's exactly what i was just going to say yeah so essentially one is on spy vol one is on spx vol but ultimately the again the correlation between those two is extraordinarily high and so that that gives us this 99.9% relationship that we have between spikes and VIX derivatives. And so it's still on the same, whatever, 200 strikes or whatever that formula is for calculating which strikes to consider, but on SPY instead of SPA. Exactly. The methodology there is somewhat different because the sizes are slightly different, But otherwise, yeah, I mean, you're talking about minute difference. Yeah. And would that even be possible at the knees yeah i mean that's basically you need you need a you need a a big um slew of options in order to be able to get a really

reliable a value for the picks and the spikes so i'll back up a little like a lot of people are upset with volatility long volatility this year, right? Because the market's down 20%. Volatility hasn't really moved. It's been rather stagnant. A couple of brief spikes, but a lot of... It hasn't sold off heavily and it hasn't spiked really. So part of me is like, oh, these guys have figured that out.

They're going to go with fixed strike vol instead of floating vol. So just how do you think about that? What would you say those people are like? Vol's not working. Why isn't Spike set? Why didn't it go up 30% today or yesterday when the Fed announced? How do you kind of just view vol in general as this year not working? Quote unquote.

Yeah. kind of just view vol in general as this year not working, quote unquote? Yeah, so I wouldn't categorize it as not working, but I definitely understand what you're saying. It is very peculiar. I think anybody who's a volatility watcher is quite stunned by what's going on, right? Because you think, wow, I mean, inflation is going through the roof, interest rates are skyrocketing. And I think part of the reason for this is because we are talking about a different asset class. Now, it may not be the world's best answer. But if you try and dissect it, all of the action right now is in interest, sorry, is in the interest rate market sphere, right? And so there, to some extent, VIX is kind of and spikes is on its own for the moment. And I think that's probably what's happening. It is very unusual.

I agree with you, particularly with all the stuff that's does kind of make sense because I think people's eyes and ears right now are focused on interest rate sensitive things as opposed to stocks. Obviously, as a longtime VIX trader and everybody on this podcast is, it normally doesn't behave like this. If you're getting interest rate moves like that, typically you'll find that volatility rising as well on equities. And that just hasn't happened. I think people are just focused on the bigger issue right now, which is inflation and rising rates. Well, I think the spikes has a good name for that, right? Because people equate the VIX to, oh, it should go up when the market goes down. Whereas spikes is a better name, connotating like,

no, this is for, I would say it's spikes down. Right. In the S and P not just down, down for spikes. And I've always, I heard someone say like,

think of volatility as the right. You're on the ship with the radar screen. And okay, here's a couple of enemy ships that just pop onto the screen. And you get that ping. That's the volatility spike. If they stay on the screen, you're not getting the big ping anymore. You already know they're there. So it's kind of like it only spikes when a new enemy comes into the radar screen. So once we know all this stuff, the Fed's telegraphing, they're going to raise rates, everything, all that comes together to be like, well, yeah, the market's going up and down, but a spikes value of X, which I got to ask you that in

a second, but I'm going to say, right. A VIX of 30 means we're going to have these 1.3% moves a day or whatever. And that's what we're getting. So from that same point, I can argue you like it's doing exactly what it's supposed to be doing. Yeah, I agree with you a hundred percent. A lot of people often say, oh, look, spikes or the VIX, they're broken or whatever. That's not the case. I mean, it's just,

it's a function of what's the most critical thing to think about right now. And certainly for us in the equity world, it's simply not equity. As you say, people are definitely focused more on the interest rate side of things just because of where we are in the business cycle. So, yeah, but it will certainly revert. It's not like VIX and SPYX is going to disappear at any time because these have fantastic utility and people are going to continue to want to trade them, obviously, because it hedges extremely well when it comes to equities. And then talk about what's the pricing, not the pricing, but the value. So a VIX of 30, is spikes going to be 30 or 30.01? Or what does that look like? Oh, well, as I mentioned earlier, like it's 99.9% correlated.

Yeah, but the moves are correlated, but even the price itself is kind of a mirror image very very close yes yeah okay so yeah right because it almost has to be because that's that's a volatility reading so you can't it couldn't be three right it's got to be no no exactly got it they're going to be very close pretty much all the time. Now, there are peculiar moments where SPY has a dividend. And so sometimes when you're going to expire on this particular date, for example, it can be slightly different. But for the most part, as I said, when you look at the values of Spikes and VIX over time, 99.9% correlated to one another. But there are obviously immediate points where there will be differences, but they're not very long lived and they're not hugely meaningful.

Yeah. And then are there already options on the futures as well? There are options. We are trying to do a lot to improve the liquidity of that and to also make people more aware because as the second mover, we need to sort of make sure that the clientele that's working with us understands all of the things that are going on. Yeah. And then there's an ETF with using these two already, right? Convexity shares. Yes, that's right. So happily on the 16th of August, we launched two ETFs. One is a one time, so no leverage, and one is a 1.5 times. And so we're really excited about that. We have some very, very good plans. And we think that this will be

an integral part of the ETF, volatility ETF space. No short ETFs, yeah. No, we made a conscious decision not to do that. So I've been trading volatility for a long, long time. And it just seemed to me that, especially when it was cemented by the 2018 debacle, it just, for us, it's got too much risk from so many points of view, right? It's the risk of your, if this thing blows up, it's terrible for you. Now, it's ironic because obviously those, the two scariest funds have actually returned, right? And ultimately, yeah, I mean, that's always

a challenge. If you're always a challenge if you're short volatility or if you're leveraged if something big happens well you know that's going to have a fairly massive impact so we we deliberately stepped away from doing those things uh and rather you know um focus on you know the one and the one and a half times it's almost like a philosophical existential question can you have the long without the short, right? Do you need the dark side to go with the light side of the force there? Right? Like if you don't have these huge sellers, is it going to spike?

But in your case, it doesn't necessarily matter because it's just tracking the SPY. But that leads to my other question. Like you mentioned 2018. Do you think at that time that the tail was wagging the dog right like we got this big move in vix some people were saying the settlement got gamed we'll leave that be but right was s&p was following what the vix was doing when by calculation it should be the other way around so just how do you think about that whole dynamic of can can the derivative of the thing get bigger than the thing itself?

Yeah, you know, that period of time just before, you know, in 2018, when just before everything blew up, it became obvious to us. And it wasn't just us. I think the whole world pretty much knew what was going on. But three or four days, I believe, beforehand, we knew that this was going to get out of control. And so it's one of those things where, you know, as I mentioned earlier, and as everybody knows, these have been reinstated. And I mean, I hate to say it, but ultimately, it's going to do it again, right?

I mean, it's just, you're waiting for it to happen almost. But it's a matter of how much you can squeeze out of it before that happens because everybody knows what happens in this, in this type of instance. It's just, it's a virtuous, no, no, a negatively virtuous cycle. It's a bad cycle because basically once you have something that's not quite right or looking dangerous, then everybody kind of, it's like everybody who's trying to get out of the door

at exactly the same time. And that's what happens with those kinds of funds. But what do you see the problem there? That they're short and as the market goes down, they have to sell more to rebalance into their...

Yeah. Yes, exactly. So it just feeds on itself. Yeah. And then even on the other side, right? Like Credit Suisse terminated the TVIX because I think they got spooked, right? They had the COVID spike.

I can't remember what the numbers were, but I think there was 80 billion or something, right? The amount of assets that, and it was an ETN, it was their note. So the note was larger than the bank itself. Yeah, exactly. Which is another cautionary tale as to why we chose to take these much sort of more considerate, I guess, levels and risk profile, because it's just not worth it. You know, look, some people, obviously, they're back out there, right?

And so people want these products and they are loved by many people. The investors just have to be aware that at some point in time, this thing is going to do what it did before. It just depends on what the catalyst is and how long it takes for that to show itself. It could be one year, five years, 10 years. Yeah, exactly. So you technically work for T3 Indexes? Yes, correct. But then you've just done deals with MyEx,

deals with, what's the ETF again? Convexity Shares? Yes, so Convexity Shares. So how does that work? Is it all three combined in there or they're separate companies and you're kind of advising for them? I think the latter. So yes, so MyEx and T3

put a joint venture together for the ETFs. We work very closely on a number of things. T3 Index is the company that I run, and we are working on some other products as well, which we are going to work with MyEx on too. So, for example, we created the first ever BitVol derivative contract, and that has actually traded OTC. We also have an EthVol index.

If you and your listeners would like to see you can go to see a lot of the stuff that we do um on our website called t3index.com um and you'll see the ethval contract and so on so we're trying to commercialize those things um going forward what what are those priced at right what's the ethval 80 or something well let me just get it i'm going to get it up on my computer so um t3 okay here we go so if you type in t3 index.com you'll find it as well under the indices tab um and let's just go to crypto all right so now you click on here um the vol is actually bit vault today is really relatively low it's only 75 vol so you know you can get a sense of um kind of what it looks like but um certainly had a lot of interest a lot of people sort of um not it hasn't traded a lot it has traded a few times but um there's more and more interest and but also this this crypto winter

winter didn't help anybody either yeah but i'm on the web so it spiked up to 108 at 75 pretty kind of looks like it stays around 75 yeah i think that's more recently, but prior to that, you know, it was, Oh, I see here. Yeah. March of 2020, one 90. Yes, exactly. And that's why I mentioned 21, one 60. Yeah. Yeah. So this thing's incredibly volatile. And also on that website, you'll also see a skew indices that we have. People like to see those. We have a vol of spikes, a V spikes index as well that people can look at, which is, I guess, a corollary of the VIX version, but ours is

on spikes, obviously. So yeah, there's quite a few things on there that you can look at. What's the seven day spikes? So we have that just as an index that's not tradable at this point. So we're sort of thinking about, we have a lot of other things on our plate at the moment, but that's one thing where we created the index. It's out there. People can see it, but it's not yet a tradable thing. And then you mentioned SKU index. So talk to me a little about skew. I think it's pretty widely misunderstood by people of whether it's an indicator of bullishness or bearishness. Do you have any views on that? So, well, technically, that's not, yeah, that's not the way I guess it should be

viewed. Basically, you're looking at the skewness of the distribution that comes with having a volatility index like this. And so that's giving you insight into, you know, the left side of the tail, the right side of the tail. And that can give you some cues. Now, I'm not saying that this thing is something that people would use necessarily, but it gives you extra context around the shape of the distribution at any point in time. And so I think that in and of itself is, is worthy for people to look at because that gives them some insight as to what the distribution looks like at this particular point. But in most cases it's skewed towards the puts, right? People want the protection more than the upside. Talk a little bit.

A lot of people complain about the VIX futures that basically getting in and out in the contract size is too large, right? If it's $50, I believe, both sides. So do you have the same multiplier there? What's the multiplier on the MyX futures? Yeah, so those standard things are consistent with one another between the two. But we are making a number of changes that will, I think, be very welcomed by the community, the trading community. Can't reveal all just yet. I know that I'm hanging. Yeah, give us a teaser.

Look, we hope to remedy the issue that you just raised. Yeah. And I think that, so the minimum tick is actually 0.01 on Spike's futures. Oh, wow. There you go. There you go. Right. Versus, I guess it's five.

Matt, what is it on fixed futures? Oh, five. Right. So five versus one. So it'll be in theory that's whatever that is and you can see it's more efficient yes absolutely and i think that that's going to make a big difference and as you can see it's public as of right now so you have the scoop the skinny we got the scoop breaking news here on the derivative my ex moving to 0.01 uh and then like what kind of do you guys do any research of like how do these new futures contracts make it a lot of

them don't make it um and you just said hey we're gonna we gotta give it a shot we believe in this right because i think a lot of people would look like oh i can't right if you're trying to create a new euro dollar future, forget it. It's just, it's entrenched. You never get there. And there have been a lot of people who've tried to compete with the CME on this. So just what are your views overall of trying to take down the 300-pound gorilla? Yeah, so that is a really vexing question.

It's very difficult to take over an incumbent especially someone as you mentioned cme for example if you're trying to look at their euro dollar futures and whatnot how are you going to break into that because everybody understands it it's been around for forever you know so it's very difficult to dislodge things however it's not impossible and i think that we are making incremental gains um with our product with spike versus versus to fix. And we certainly have the belief that we can do it. And we've got, you have to think outside the box. That's the real problem, not the problem, but that's the real barrier to entry because you can't simply make a facsimile of something else and hope that, you know, that cost alone will be the driver for them to move from one to the other.

So that's not going to happen. But as I said, I mean, we're not going to reveal all of the secret sauce, but, you know, we are certainly mindful of the fact that we need to differentiate in order to get people to move across to us and to have a reason to want to move. Yeah. And it's like a multi-layered problem, right? Because it's not just having the better product. You have to have the liquidity, right? Because even I could be like, I love this product. This thing's better. All the terms are better, but I can't go there as a billion dollar hedge fund until there's enough size to support my trading. So it's like a chicken or the egg of like, how do you get the liquidity in order to get the liquidity? Exactly. And the chicken and the egg is the thing that is probably most bandied around in my ex,

because obviously we come up against giants. And so we need to be smarter about what it is that we do and the offering that we can give to clients so that they want to make the move to make the shift. So look, we're confident about it. The MyEx team are fantastic. And, you know, we're putting our heart and soul into making things better. Wanted to ask you, Simon, the past couple of days, right? We've had the Fed announcement. We were going down to new lows today. How has it reacted?

Has this been kind of the first stress test of some kind of really volatile intraday markets? And has it been okay? Everything working as is, as should be? Yeah. and has it been okay? Everything working as is, as should be? Yeah, so as we mentioned earlier in the conversation, we were talking about the robustness of the Spikes Index, and as we mentioned there, since 2017, we have had absolutely no issues with it whatsoever in terms of printing and having the right values. And so I thought I'd bring it to your mind that today in particular-

You sent me a chart I'll pull up while you're talking about it. Yeah, sure. So in this case here, we had a Fed event and that led to a rise in volatility for this sort of only momentarily, but that's what we can see here on the screen. And the difference between the two, in this particular instance there, you can see that spikes registered a value of 27, whereas VIX was 30.18. And spikes, for those who can see this,

is the orange there? Exactly. And so you can see here that it doesn't quite look right, you know, and the thing spiked, and then, no pun intended, and then it came back down straight away. So it's one of those things that I think really showcases the, the strength of the actual index and the robustness of it. And, and as I said, since 2017, we've never had a single millisecond of outage.

Yeah. But in my brain goes to, well, like, no, it's, you want it to spike. It's the fix, but if it's not real, yeah. Yeah. I guess it's you want it to spike it's the fix but if it's not real yeah yeah i guess you don't want it to spike exactly yeah you want to have you want to have faith in the the metrics that you're getting you know so just because it's a higher level doesn't doesn't mean anything i mean it could it more than likely means that it's not quite right you know so that's something that we need to be mindful of and this is the index itself or the futures this is the index itself yeah and so being volatility trader probably what are your thoughts on the rest of the year do we stay here around 25 30 have we moved to like a whole new

regime where we're always in this higher vIX spikes or what are your thoughts? Oh, that's the million dollar question. My crystal ball is that I think, well, as you mentioned early in the conversation that we had, it was peculiar. It seems quite peculiar given the lack of movement in VIX, given all of the things that are going on around us where things are imploding and exploding. I don't think, well, obviously, that's not going to continue. You can't have a dichotomy that's so large between those two. Eventually, you know, you're going to have these things normalised. I do feel as though we're not yet out of the woods. So as far as my money goes, I think that we're more likely to see VIX rise and spikes rise rather than the other way around for the time being, at least.

But just mathematically, couldn't you have a scenario where the market goes down 2% a month for 20 months, right? And volatility would be next to nothing. So the spikes in that case would be quite low uh i don't i don't think so simply because you know if you think about the backdrop of all of the things going on around the world like the ukraine situation and russia trying to blow them up and and and oil prices and stuff it seems like there's a heady mix and it's almost like volatility is the only thing that hasn't really ruptured yet um so i I don't think it's a situation where the VIX and spikes are going to continue to recede. I think if anything, it's likely more likely to be the other way around.

But I'm just saying mathematically in the calculation, you could construct a scenario where the market goes down a lot and volatility does not move, right? Yeah, agreed. market goes down a lot and volatility does not move right um highly unlikely because you'll have people who want to buy dips and people who want to sell rallies and all that but in mathematically it's possible which i feel like is some of what's happened this year if you're just mathematically the moves have been within the expected moves yeah that's exactly at the end of the day that's the definition it's an expectation of what's going to happen. And speak to that. It's the same, right?

It's the define what it's the 30 day pricing and it's a rolling 30 days. Yes. Yes. So the mechanisms are not wildly dissimilar to the way the VIX is constructed. So that's kind of nice. But yeah, maybe just talk through that for a second because I don't think a lot of people who trade and know the VIX even know

how that calculation is actually done. Just in terms of time and the look back or look forward. Right. So essentially you're talking about the creation of the vol index. Yeah, yeah. Is that what you're talking about the creation of the vol index. Yeah, yeah. Is that what you're talking about? Yeah, right. So in our case, we're using SPY, obviously with VIX it's SPX.

And those are the constituent options that go into the creation of the index level. So what happens there is you'll look at the entire SKU. We obviously mentioned SKU earlier, so it's kind of handy. You'll look at the highest call all the way down to the highest put or the rather the lowest put and then you sum you sum those things um with the mathematical formula and out pops a single value which is but those are all 30 days to expiration options yes yeah that's right yeah um for whatever reason that's that's the particular um time frame that

was used and pretty much anyone who does a volatility index these days, typically you're going to use the same thing. Right. Which is interesting. Like, why did you look at that or think of that? Like, Hey, what if we did a 90 days to expiration volatility index? Internally, we have done that. We've got multiple multitudes of versions of these things. So, but the problem is that people are used to the 30-day value and it's very hard to dislodge that and sometimes they might say well what's the point of knowing the 90-day but yes yes obviously it's very easy to compute that once

you have the methodology at hand uh and then right now you want people to be able to arb between the two and do you see any of that happening of like there's potential for arb between the two and do you see any of that happening of like there's potential for are between the two you mean between the short and along or between no between spikes and vix yeah um well as we mentioned earlier that that famous 99.9 number it's it's already there i mean they are effectively facsimiles of one another um and the only difference is as we mentioned earlier which is just occasional but sometimes there will be differences between spikes and vicks and that's um because i think if i'm allowed to say i think ours is constructed extremely well yeah but they're not they're fungible or no probably not well it depends if you think 99.9 correlations fungible i i think that's well no i mean like actually at the fcm level of like okay your long

spikes offsets against your short picks oh right yeah so right like if i in the old days i had one big s&p they don't offer it anymore versus five you know if i was long one big s&p short 5e mini s&p um they would fungigate fungigate is that the word um oh yeah fungible are fungible maybe yes are fungible but you'd think that there'd be some high frequency guys or some prop firms that are like okay i'm right i'm at the offer in vix and i'm on the bid in spikes and if i can get them to line up and i can grab a penny um especially with the increment change that could come into play too yeah yeah and and i also think that well one thing to note um is that the occ and mjx have a cross margining in the works so that's really going to help us a lot, I think. So that's a very good development for us.

And I meant to ask that too. So there's options, but those are security or those are futures? There's options on the futures or just securities options? Yes, securities options. Got it. So just like now, if you're trading VIX options, that's a security. We are planning to expand. Obviously, I can't reveal anything of that by the moment,

but we are looking to expand our offering as well. So it should make it easier for people. Perfect. All right, Simon. Send me an invite to come visit you and I'll be there in two minutes. Especially with the cold coming here in Chicago. Yeah, that's going to be tough. Any last thoughts?

No, look, I really appreciate the opportunity to speak with you about this and our products and the folks at MyEx. I think we're doing a really good job. And for people who don't know about Spikes and the ecosystem that we're building, I certainly encourage you to take a look because... And will you get mad like the SIBO if people call it the Spikes Index? Right? SIBO gets really mad if you call it the VIX Index. Like, no, it's just VIX.

VIX implies it's an index. Yeah. I could care less about that, to be honest. It's good because that nomenclature drives me crazy. I'm like, who cares? And then we ask all our guests, I didn't prep you for this, but you got a hottest take? Hottest take?

Yes. I don't know what that means. That Australian football is better than american football or you know something a little controversial either inside the volatility space or outside of it or wherever you want to go oh that's a good one um you've got me on the spot here uh yeah i'm gonna say that australian beaches are better than american beaches it's hardly hardly contested really but yeah i would say that Australian beaches are better than American beaches. It's hardly contested really. Yeah, I would say that's pretty easy.

Awesome. Well, thanks for your time. Good talking to you and we'll talk to you soon. Best of luck with the spikes, the spikes index, whatever you want to call it, just call it spikes. Thank you very much for having us. Really appreciate it. You've been listening to The Derivative. Links from this episode will be in the episode

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