Exploring the Future of ETFs: Insights from Cboe on Embedded Options, Strategies & Market Evolution

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00:00Welcome.

00:01Benzinga Nation.

00:02Today, we've got another great conversation with Rob Morocco, who is the vice president

00:08and global head of ETF listings.

00:10Rob, welcome to the show.

00:11Thanks for having me.

00:12Absolutely.

00:13You know, there's so many great things to talk about here, but for the folks that might

00:16not be familiar, give us a quick, brief overview of SIBO Global Markets and its listings business

00:22as well.

00:23Absolutely.

00:24So, most folks know SIBO as the innovator for derivative products and really the listed

00:31options market dating back to 1973.

00:34Today, the organization really is at its core one of the largest global exchange operators.

00:40We operate 26 markets around the globe.

00:43Very specifically with listings and what does that translate to, as you mentioned, I look

00:47after our ETF business.

00:49We have a network of five different exchanges globally that we're working with global asset

00:53managers and local issuers of ETFs and listing their products on our markets, on our equity

00:59exchanges, on our stock exchanges, essentially.

01:01Today, we're listing ETFs in the US, Canada, the UK and Europe, as well as Australia.

01:09So, we just ticked over 1,000 ETFs this year, very specifically in the US.

01:16We are actually the second largest exchange by number of primary ETF listings, so the

01:21listings that are on our exchange.

01:23We've done that really all over the last nine years and becoming really focused on

01:29being best in class in working together to service ETFs and make sure that the trading

01:33of those ETFs on our exchanges is robust and liquid.

01:37So there's obviously so many different things that you're doing in the ETF space, especially

01:41when it comes to option strategies.

01:43I want to talk about the defined outcome ETFs.

01:45Tell me a little bit more about the rise of that and the popularity it's gaining.

01:49This has been a real key focus, not only for us, but much of the industry because typically

01:56these types of strategies were not available.

02:00They were not available in an ETF wrapper, but they were typically over-the-counter products,

02:05not necessarily always readily accessible, and quite frankly, only available to certain

02:12types of investors that had minimums and a little bit more exclusivity, if you will.

02:17What the ETF has done for these target outcome, defined outcome, buffer ETFs, has really,

02:23the ETF wrapper has democratized and allowed for just greater access.

02:27Very specifically, what in a nutshell these products are, is a very simple options trade

02:34underneath that's either using a broad-based index or on top of an existing ETF, like SPY

02:41for instance.

02:43They're implementing a options trade that you were giving up a little bit on the potential

02:49upside, but you're having a buffered or a defined outcome as it relates to protection

02:55on the first 5, 10, 15, 30% of the downside.

03:01Very similar to what would typically look like a structured product, but now wrapped

03:06up in an ETF.

03:07Very simple.

03:08Typically, it's using, the ETF is implementing flex options inside of the portfolio in order

03:14to allow for that outcome during that period.

03:19And so it's a very clean way of putting on a pretty sophisticated strategy at a very

03:26affordable price.

03:27So that's ultimately why these, in my personal opinion, these products have been so successful

03:33over the last three to five years as we've seen them come.

03:38When these products originally came, it was from a few core issuers.

03:44Now we clearly see other asset managers adding these types of products to their shelves.

03:49It's a clear indication that these products not only, I believe, are here to stay, but

03:54the continued growth in the trading volume and in the assets that are going into these

03:59products.

04:00Yeah.

04:01I remember when I started learning options, then there was, all right, how do I take it

04:02to the next level?

04:03And you get involved with ETFs and you've got iron condors and butterflies.

04:07And I'm like, how in the world?

04:08Like what?

04:09So there's a lot of great ways to adjust to your strategies that the individual may have

04:14at home.

04:15You mentioned the issuers and I want to see how SIBO kind of, give me a sneak peek behind

04:17the scenes of how SIBO works with issuers to kind of develop these options-based ETFs.

04:23Absolutely.

04:24So first and foremost, we have the derivative experts in-house given just, again, our legacy,

04:30our core competency.

04:32So we have a significant depth of bench.

04:36So as issuers are going to the drawing board, working through the product development, how

04:39is SIBO able to aid in some of that product development work with some thoughts?

04:46Are there opportunities to enhance the underlying contracts that are going to be used?

04:51So for instance, in case in point with the defined outcome ETFs, we created new order

04:56types for the option so that the portfolio manager is able to better manage the ETF,

05:02have more flexibility when managing the ETF.

05:05So we're working with them on a product development perspective.

05:08In many cases also, we are able to create indices, create an index for the ETF to track.

05:13And so our index group and our data group work very closely as part of that product

05:17development, product consultation.

05:20On the actual strategy, great, it's baked.

05:24We now need to list.

05:25Well, how are we going to list it?

05:26Do we have the ability to list it under our rules or do we need to go seek permission

05:32from the regulator in the US, the SEC, other regulatory bodies around the globe?

05:37So it's making sure that we have the regulatory piece and the framework ironed out.

05:42And then ultimately, what is that once it lists?

05:45How do we work together with our issuer and the market maker and market participants of

05:49our change to make sure, number one, fair and orderly market, but two, that there is

05:54deep liquidity so that as advisors, as retail folks want to access the product, they're

06:00going to have a good experience when entering or exiting a position in the ETF.

06:03Yeah, the liquidity aspect of it is huge, especially so that the trader, the individual

06:08can get in and out of positions without kind of sacrificing on the spread, if you will.

06:12You know, as a retail trader myself, I've seen the change in the landscape in the past

06:16three years, especially since COVID and the rise after.

06:20But I want to get insights from you, from SIBO.

06:23How has the trading landscape kind of changed in the past three years?

06:26Look, we all went through the last three, almost four years now since COVID and everyone

06:33saw the uptick in retail trading.

06:36And retail is still very well and alive from a trading perspective.

06:42The best example I could point to has been this year, earlier in January, in the U.S.

06:47we received regulatory approval and the ability to list spot Bitcoin ETFs.

06:52And so we listed these products.

06:54We listed six out of the 11 that came to market.

06:57And the trading volume has just been absolutely tremendous, absolutely tremendous.

07:02Over the list, as we're approaching almost that six month point, these have been some

07:06of the most liquid ETFs, not only in the marketplace, but in terms of a new launch, just very, very

07:13atypical.

07:14And when we look at that trading volume and we look at what size of those trades, small

07:19trades, one, two, three, a lot of odd lot trading, right?

07:23And clearly indication, it is a lot of retail activity accessing those ETFs.

07:29And I think, again, it's a testament to that retail could go directly and buy, and many

07:34do, digital assets, digital coins.

07:39But the ability, once a product is wrapped in an ETF and the accessibility and the ease,

07:44and now it's in my brokerage account with the rest of my stock portfolio, stock and

07:50ETF portfolio, it just, it's a, again, it's a testament to the access that the wrapper

07:55affords.

07:56Now, you know, if you ever see a small lot being traded, it's probably me.

07:59But speaking of which, you've got retail, right, that we've been kind of having a point

08:03focus on this conversation.

08:05What impacts have they had on the industry, whether it's, hey, we've had to kind of pivot

08:09a certain thing.

08:10So make sure that we provided quality offerings to the retail side.

08:15How have they impacted the industry?

08:17I think the impacts is really the democratization, to be honest.

08:21And Defined Outcome is a perfect example of that, where, again, that type of strategy,

08:29if you were able to access it, again, retail investors typically wouldn't have the ability

08:35to find a product like that, that they could easily be able to put an exposure on at a

08:44competitive price point in a transparent and fair market.

08:49That wrapper just, it's, the impact has been just greater access, greater access, greater

08:54choice to really some spectacular products that are out there.

08:59And so that I think the impact has been really not so much on what is the industry needed

09:04to do to accommodate.

09:06Clearly there is a capacity, clearly our market structure, especially in the US, extremely

09:12robust.

09:14I think it's more around the impact to being for retail to access strategies that necessarily

09:20were different, were harder for them to get to and at the same price point.

09:26All right.

09:27Well, hey, I appreciate your time here today.

09:29It's always fun to talk with Sibo about ETFs, options, always a great time.

09:33Thanks so much for the conversation.

09:35You got it.

09:36That is Rob Morocco, who is the Vice President and Global Head of ETF Listings.

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