The stock market has a new “Fear Index.”
Bats Global Markets, the exchange operator and trading specialist, is launching a new gauge of stock market volatility with options specialist T3Index.
The index, which will be known as SPYIX, or Spikes, will compete with the widely-used CBOE volatility index, which is known as the VIX and is often described as the “Fear Index.”
These indexes aren typically put together by using option prices to measure market expectations of volatility.
They are an important tool for traders and are used to get a read on market sentiment. When the VIX spikes, it as seen as a sign that investors are fearful and expect the market to swing wildly.
In the case of SPYIX, the index will measure expected 3o-day volatility on the SPDR S&P 500 exchange-traded fund. The new index differs from the VIX in that it is calculated using electronically-traded SPY options, as opposed to manually-traded S&P 500 index options.
That is an important distinction because in times of stress like August 24 2015 — when the market went haywire and stocks swung wildly — slower, manual trading options can lead to a delay in pricing. That means the very thing that is meant to track volatility can on occasion break down during volatile periods.
With that in mind, Bats is marketing SPYIX as a smoother, more reliable alternative to the VIX. In a fact sheet for SPYIX, the firm said on August 24, it was not possible for the CBOE Vix index to be calculated for around half an hour. The SPYIX, in contrast, was calculated from the opening seconds.
Tony Barchetto, executive vice president and head of corporate development for Bats, said: “In the wake of recent events, the SPYIX is Bats’ response to the market’s demand for a more rigorous and dependable volatility gauge. SPYIX is specifically designed to better capture and reflect today’s largely electronic options market.”