DRW Teams With CBOE to Build New Class of Futures Contracts

The CBOE Futures Exchange (CFE) said it's teaming with Chicago-based proprietary trading firm DRW Trading group to create a new class of swap-like futures contracts that are based on the Standard & Poor's 500 index.

These contracts, which are aimed at traders who haven't traditionally participated in the over-the-counter variance swap market, are expected to start trading later this year pending regulator approval, the firms said. Variance swaps are designed to measure the difference between the expected and actual variance of an underlying instrument over a fixed timeframe.

The companies said at least $10 million in variance swaps on the S&P 500 are estimated to trade every day in the over-the-counter market, depending on volatility. Marketwatch, a Wall Street Journal publication, pointed out these contracts will let traders make bets on changes in stock market volatility. And although they'll mimic elements of OTC derivatives, they'll be traded and cleared like standardized futures contracts, Marketwatch noted.

"Access to variance swaps has typically been limited to the large OTC broker-dealers," DRW Chief Executive Donald Wilson said in a statement. "By creating an economically equivalent futures-style contract, more market participants will have another avenue to mitigate volatility risk exposure. In addition, with more players in the market, both groups can benefit from an increase in market liquidity."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio