Volatility is the main driving force of financial markets. Where volatility appears, there is also increased trading activity by traders and investment firms. The latest data suggests that participants are looking for new products that allow them to leverage market volatility better.

A recent study by Acuiti, conducted in association with MIAX, suggests a surge in demand for volatility products in the derivatives markets. The research reveals that firms and traders are increasingly looking to hedge risk and profit from the spikes in volatility, which is a characteristic of equity markets from 2020.

Traders Show Rising Demand for Volatility Products

According to the study named ‘Expanding Horizons in Volatility Trading’, 44% of the Futures Commission Merchants (FCMs) reported increased demand for trading volatility since 2020 from their client base. This research involved 94 proprietary trading firms, hedge funds, banks, interdealer brokers, and major FCMs serving the derivatives market.

The findings suggest that firms trading volatility are keen to expand the ecosystem with new tradable products parallel to established ones. Moreover, the respondents expressed a desire for innovative products that could reduce trading costs and improve execution, such as futures and options with smaller tick sizes.

Traders are calling on exchanges to innovate and introduce new concepts to the market, with methodology viewed as a crucial factor for any firm considering a new product. One notable finding is the strong demand for new derivatives contracts among volatility traders. This indicates a significant appetite for expanding their trading options within the volatility trading community.

“There is significant room for innovation in volatility markets,” Ross Lancaster, the Head of Research at Acuiti, commented. “Different products with different methodologies will enable firms to trade across different measures of volatility, expanding the strategies used and creating basis and arbitrage trading opportunities.”

The report also suggests that volatility trading is expected to experience substantial growth in the future. Many firms are planning to adopt this asset class and trade new products alongside their existing ones, further driving the expansion of volatility trading.

Index methodology emerges as a crucial factor for most market participants. The success of any new contract is heavily influenced by the methodology used to calculate the index, making it an important consideration for traders and investors.

Additionally, the report reveals a growing trend in the popularity of short-dated options trading. This trend has the potential to greatly impact expectations for listed volatility products and their associated calculations.

In another report published recently, Acuiti revealed that Asia is currently the most popular region for trading new markets among proprietary trading firms, hedge funds and bank execution as well as trading desks.

SPIKES vs VIX

The VIX, offered by the CBOE, is the most popular volatility product. It calculates volatility based on S&P 500 options traded exclusively on its exchange . On the other hand, MIAX provides its own volatility index called SPIKES, which measures 30-day expected volatility using options on the SPDR S&P 500 ETF, the world's largest exchange-traded fund.

“Demand for volatility products across futures, options and ETFs remains strong, with market participants continuing to look for ways to manage their risk and hedge portfolios even during times of low volatility,” Kaitlin Meyer, the VP of Marketing and Sales at MIAX, commented.

Meyer highlighted that SPIKES Volatility Products offer traders an alternative when trading products based on the volatility indexes, boasting a more robust methodology and lower exchange fees to support their strategies.

A significant finding of the report was the willingness of volatility traders to diversify their trading by including new volatility products. As much as 79% of the respondents expressed their openness to trading SPIKES alongside established volatility products.