The COVID-19 crisis has hit the financial sector particularly hard. Real estate investment trusts (REITs) have all suffered, as have banks. One bright spot has been the exchanges, where credit risk is minimal. 

Cboe Global Markets (NASDAQ:CBOE) houses the Chicago Board Options Exchange, the premier options exchange in the U.S., which handles S&P 500 (SPX) options trading as well as the Volatility Index (VIX) products. Cboe also includes the Better Alternative Trading System (BATS) Exchange, which trades cash equities and futures. 

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Increased volatility, higher EPS, and electronic trading

Cboe Global Markets recently reported first-quarter results. Earnings per share increased 67% to $1.42. Net revenue increased 28% to $358 million, while EBITDA rose 44% to $265 million.

Increased volatility drove higher trading revenue, and as a general rule, volatility encourages the use of derivatives to manage risk. Options net revenue rose 36% to $189 million. The company's market share increased to 38.3%, compared with 36.8% in the prior year's quarter. Stock trading revenue rose 14% to $87 million while futures trading revenue increased 36% to $40.1 million.

During the quarter, Cboe Global Markets shut down its physical options-trading floor and migrated to 100% electronic trading. With the help of the Securities and Exchange Commission, it was able to accomplish this in two days. To help the process, Cboe spent extra resources to bolster Silexx, the exchange's proprietary order-management and trading system. In addition, the company offered Silexx free to floor-trading permit holders to help the transition. Cboe hopes to be able to reopen the floor by June 1, provided the risks to health are manageable.

A wild March gives way to a subdued April

The first quarter was a period of high volatility, and volatility is great for options traders. During March, we saw incredible volatility across asset classes, from stocks to interest rates and commodities. High volatility in March gave way to slower activity in April. On the earnings conference call, Cboe CEO Edward Tilley discussed the current trading environment:

As we have seen before, in the midst of extreme market uncertainty, the world turns to Cboe to leverage the utility of SPX and VIX options and VIX futures to navigate market turbulence. This played out vividly in the first-quarter 2020, with year-over-year increases of 43% in index options and 44% in VIX futures as investors repositioned and monetized hedges during the subsequent market sell-off. Higher trading volumes in the first quarter gave way to lower volumes across our proprietary products in April.

A collapse in VIX assets

In other words, during the extreme volatility of March, investors reduced risk and then took the month of April to assess where markets stand. The company expects that trading volume may ebb and flow over the next several months as investors begin to rebuild positions. Part of the drop-off in activity was driven by a huge drop in assets under management for many of the exchange-traded products that revolve around the VIX. Tilley said that the assets under management for VIX products are about 10% of what they were pre-crisis. This was largely due to funds that hedged their investment books with VIX options, choosing to take the cash at expiry and rollover positions. In other words, the products did what they were supposed to do. 

While the exchanges will experience ebbs and flows of trading volumes, as a general rule they benefit in these sorts of volatile markets; other financials such as banks and REITs do not. We have seen similar strong performances out of the Intercontinental Exchange, which owns the New York Stock Exchange, and CME Group, which operates commodities futures and options exchanges. Cboe trades at 21 times the 2020 earnings estimate and has a dividend yield of 1.35%. If you are looking for a financial stock with less credit risk than a bank or REIT, Cboe Global Markets could be a good place to wait out the storm.