Goldman downgrades Cboe after the ‘unwind’ of wacky volatility products


A part of Cboe Global Markets‘ key futures business is at now risk after the recent implosion of volatility-related securities this week, according to Goldman Sachs.

The firm lowered its rating for Cboe shares to neutral from buy, predicting investors may flee from the company’s key product franchises.

The VelocityShares Daily Inverse VIX Short-Term declined 93 percent on Tuesday after the CBOE Volatility Index, or VIX, surged by 115.6 percent on Monday. XIV is issued by Credit Suisse and is supposed to give the opposite return of the VIX.

Credit Suisse announced it is triggering the liquidation of the product after its price collapse.

“While we remain optimistic around the firm’s longer-term growth prospects resulting from Cboe’s combination with Bats Global Markets, we expect the unwind in VIX exchange-traded products (including any potential further unwind of these products) to weigh on Cboe’s VIX futures franchise, creating headwinds to the firm’s top-line growth and potentially the stock’s valuation,” analyst Alexander Blostein wrote in a note to clients Wednesday.

Cboe shares dropped 10 percent on Tuesday as investors worried over falling demand for its VIX futures if these exchange-traded notes go away.

J.P. Morgan also downgraded CBOE to neutral from overweight.

“While the liquidation and fall of various ETNs represents a risk to VIX Futures volumes, we see this as potentially the tip of the iceberg with a likely reduction in VIX Futures trading activity looking out 1-2 months,” stated the J.P. Morgan note. “We also see some risk to volumes in VIX options.”

Goldman’s Blostein noted VIX futures represented roughly 12 percent of CBOE’s 2017 revenue and 40 percent of its sale growth from 2015 to 2017.

He also cut his price target for the company’s shares to $115 from $140, implying 2 percent downside over the next 12 months.

Shares of Cboe are down 3.7 percent Wednesday following the call.

Cboe declined to comment for this story.

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