Stock exchange group Bats Global Markets has launched a new volatility index – the SPYIX Market Volatility Index – measuring the expected 30-day volatility in the SPDR S&P 500 ETF (SPY), the world’s largest and most actively traded exchange-traded fund.

Bats introduces volatility index based on SPY ETF

Launched in collaboration with financial indexing firm T3Index (T3), the index is calculated using prices from highly-active, electronically-traded options on the underlying ETF, an improvement over the slower, manually-traded, floor-based S&P 500 Index options used to calculate other volatility benchmarks.

SPYIX also includes important features designed to enhance critical stability during periods of low liquidity in the market, namely its proprietary “price-dragging” technique which helps reduce erratic movements in the index.

Price dragging is when the price of an option in the index is updated only when a trade occurs or the quote passes through the current price level. This helps to prevent routine quote adjustments in out-of-the-money options from unnecessarily impacting the index value.

The index can be physically replicated with a strip of options, and may thus serve as the basis for the creation of investable products such as exchange-traded products.

Tony Barchetto, Executive Vice President, Head of Corporate Development at Bats, said in a statement: “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.”

Simon Ho, CEO at T3 Index, commented: “We are pleased to join with Bats in instituting a transformative index like the SPYIX. As an example, SPY options were actively quoted from the market’s opening seconds on August 24, 2015, and we were able to calculate the SPYIX during a time sensitive period when legacy volatility gauges weren’t available to the many investors who were relying on them. We are looking forward to leveraging our firm’s unique benchmarking strengths to find other ways to serve global markets together.”