Chicago Board Options Exchange

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Chicago Board Options Exchange
Image:cboe_logo.gif
Founded Apr. 26, 1973
Headquarters Chicago
Key People William J. Brodsky, Chairman and CEO; Edward Joyce, President and COO; Edward T. Tilly, Executive Vice Chairman; Bradley Griffith, Vice Chairman;

Alan J. Dean, EVP/CFO; Richard G. DuFour, EVP; Joanne Moffic-Silver, EVP, General Counsel & Corporate Secretary; Gerald T. O’Connell, EVP/CIO; Edward L. Provost, EVP, Business Development; Philip M. Slocum, EVP, Trading Operations;

Patrick Fay, SVP, Member and Regulatory Services; Timothy H. Thompson, SVP and Chief Regulatory Officer.

Products Options on equities, equity indexes, ETFs (+futures and stock exchange)
Web site www.cboe.com

The Chicago Board Options Exchange was founded in April 1973 as the first U.S. options exchange offering standardized, listed options. CBOE, where in 2007 almost one billion contracts with a notional value of $24 trillion were traded, was as of 2008 - according to the exchange - the largest of the seven U.S. options exchanges in total volume and market share.

CBOE offers options on 2,200+ equities, on 22 broad-based and sector-based indexes (SEE CBOE index options), and on 140 ETFs, among other products.

Trading at CBOE is carried out by way of the exchange's Hybrid system, which enables customers to choose how their orders are handled – either electronically or through open outcry. About 95 percent of CBOE orders are traded electronically, which equates to between 50 and 60 percent of the exchange's total business. The remaining transactions, traded via open outcry, typically are large or complex institutional orders that use the skills of floor brokers to "work the order" to gain potential price improvement.

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Contents

CBOE Business Model

CBOE's business model focuses on new product development, which since 1983 has resulted in finding innovative ways to use benchmark indexes in options and, more recently, in futures applications.

CBOE seeks new business opportunities, which over the last few years have incorporated the scalability of its electronic trading platform, CBOEdirect. This technology platform was built and is maintained in-house by CBOE and supports multiple trading models, configurable by product. Besides using CBOEdirect as the electronic platform for its options trades, CBOE has launched two new fully electronic exchanges using the platform:

In addition, CBOEdirect is the trading platform for OneChicago, the electronic single-stock futures exchange owned jointly by CBOE, Interactive Brokers and CME Group.

In January 2006, in anticipation of future demutualization, CBOE shifted its corporate business model to a for-profit approach. In February 2007, the exchange filed an S-4 with the SEC, which subsequently was amended (updated) in May 2007 and May 2008. [1]Demutualization would require regulatory approval and an affirmative vote of CBOE membership.

If a demutualization is completed, one plan considered is to go public. An issue facing demutualization most recently was CBOT members’ exercise right privileges. The SEC in January 2008 agreed with CBOE's contention that the CME/CBOT merger effectively voided exercise rights. The issue was then scheduled to be heard in Delaware court in early June 2008.[2]

On June 2, 2008, it was reported that the CBOE and CME had, for a guesstimated $1 billion, settled an almost two-year lawsuit that had prevented the CBOE from pursuing demutualization. The settlement, pending approval of CBOE members, would provide full CBOT members with an 18-percent stake in the CBOE and $300 million in cash, according to one reporter, with terms worth roughly $1 billion. To qualify for the settlement, CBOT members had to have valid trading rights at the CBOE and own 10,251 shares of the CME Group, which was formed in 2007 when the CME bought the CBOT. Previous rejected settlements ranged between $850 million and $1.3 billion.[3][4] [5]

Products

Options on Equities

More than 2,200 equity options are listed at CBOE.[6]

Options on indexes

CBOE as early as 1983 began to establish exclusive licensing agreements with Standard & Poor's to offer security index options based on the S&P 500 (SPX) and S&P 100 (OEX), and later with Dow Jones on the Dow Jones Industrial Average. In addition, the CBOE has created proprietary indexes and index methodologies, e.g., the VIX and a long list of volatility products, for tracking market volatility and investor sentiment. The exchange has been recognized as a leader in index product development and as the creator of volatility products.[7][8]

Awards

  • 2007 & 2008 - Exchange Leader in Fund Innovation for "Most Proactive Exchange for ETF Derivatives—The Americas:" Third (and Fourth) Annual Global ETF Awards
  • 2007 Leader in information technology - CIO 100 award: CIO Magazine for operational and strategic excellence in information technology (IT)
  • 2006 Leader in Exchange Performance Award for World's Best Derivatives Providers: Global Finance magazine
  • Award-winning Web site: Forbes "Best of the Web," five years running

Index-Releated Products

Some of the 22 indexes (as of March 2008) on which CBOE offers options, are:

Large-cap indexes

Small-cap indexes

Micro-cap indexes

Volatility indexes

Additional Products

FULL LISTING OF CBOE index options

FULL LISTING OF CBOE ETFs and HOLDRS

Benchmarks Calculated by CBOE

CBOE calculates a number of proprietary indexes, including the indexes in the list below. CBOE has won numerous innovation awards stemming from the development and application of many of these indexes:


CBOE Executives

Technology

In 2003, in response to expanding technology needs of users, CBOE introduced the CBOE Hybrid Trading System to provide customers a blended solution of both screen-based and open outcry trading models. The practical philosophy behind Hybrid was that customers should be allowed to choose whether their orders are represented in the face-to-face, open outcry marketplace or submitted to the electronic environment. With CBOE Hybrid, trading crowds continue to offer price improvement to orders of size, multi-asset orders and other orders that are exposed to the open outcry, auction market. In the electronic environment, CBOE Hybrid provides price improvement opportunities through features like Automated Improvement Mechanism (AIM) and Complex Order Auction (COA).

CBOE Hybrid lets market makers submit real-time, streaming quotes reflecting their individualized trading interest. CBOE disseminates the best bid and offer from all market participants, resulting in tighter, deeper markets that can be accessed electronically by customers. According to the exchange,[9] liquidity is enhanced by remote participants - Electronic Designated Primary Market Makers (e-DPMs) and Remote Market Makers (RMMs) - as these market participants are allowed to stream quotes and trade electronically from remote locations.

Prior to the advent of the Hybrid System, CBOE introduced other technological solutions, including:

  • 1984 - Launch of Retail Automatic Execution System (RAES) to facilitate electronic order execution;
  • 1989 - Introduction of EBook, the first electronic customer limit order book;
  • 1993 - Market makers on the CBOE trading floor use electronic, hand-held terminals;
  • 1999 - Introduction of ROS, the Rapid Opening System, to shorten the time taken for the opening rotation;
  • 2001 - Launch of CBOEdirect; the exchange's screen-based trading system, initially used for extended hours trading

CBOE Educational Efforts

The Options Institute, the educational arm of CBOE, debuted in 1985 to educate investors about options. Each year, hundreds of seminars are held in the U.S. and internationally, aimed at individual and institutional investors, market regulators and others. Curricula are produced and courses are taught by CBOE trading industry professionals.

With the advent of technology and on-demand education, the Options Institute has added a comprehensive listing of online curricula to its live seminar lineup. These educational efforts are sponsored both by CBOE and by options-related firms to give investors and institutions an increased appreciation for options strategies and how they can be used in various portfolios to manage risk/maximize profit.

Today CBOE also hosts CBOE TV, which features an extensive list of online programs and podcasts on daily market developments, options products and practical strategies.

CBOE Volume Highlights

  • 2007 trading volume totals - 944.5 million contract volume (3.76 million average daily volume) - fourth consecutive with record trading volume. This was a 40 percent increase over 2006 when nearly 675 million contracts changed hands. Total volume in equity options during 2007 tallied a new record of greater than 500 million contracts traded (average daily volume of just less than 2 million contracts), an increase of 28 percent over the 391 million contracts traded in 2006. In index and ETF options total volume, a new record of 444 million contracts were traded during 2007, 56 percent over the 284 million contracts traded in 2006.
  • July 2008 - All-time high trading volume at CBOE -- CBOE announced that July was its most active month ever as a total of 126.2 million contracts traded, with an average daily trading volume of 5.7 million contracts. July's volume beat the previous monthly record set in January 2008 when 110.8 million contracts changed hands at CBOE, averaging 5.3 million contracts per day.July volume also was 45 percent greater than July 2007 volume of 87.2 million contracts. trading volume in equity options totaled a record 67.2 million contracts and surpassed 46.1 million contracts traded in July 2007 by 46 percent. Total volume in ETF options rose 70 percent - to a new high of 34.4 million contracts - against July 2007. Trading in the cash-settled indexes during July increased 18 percent to 24.5 million contracts over July 2007.
  • June 2008 - CBOE average daily trading volume in June totaled 4.9 million contracts per day, up 39 percent when compared to more than 3.5 million contracts per day during June 2007. Total exchange volume during June rose 39 percent to 103.3 million contracts, up from June 2007 volume of 74.4 million contracts. Total contract volume at CBOE year-to-date through June 2008 was up 31 percent to 558 million contracts from 426 million contracts during the same period one year ago.
  • May 2008 - CBOE average daily trading volume in May totaled 4.1 million contracts per day, up 16 percent when compared to 3.5 million contracts per day during May 2007. Total exchange volume during May rose ten percent to 85.6 million contracts, up from May 2007 volume of 77.6 million contracts. Total contracts traded at CBOE year-to-date through May 2008 were up 29 percent to 454.5 million contracts from 351.6 million contracts one year ago. Total contracts traded at CBOE year-to-date through May 2008 were up 29 percent to 454,457,564 contracts from 351,629,603 contracts one year ago.
  • March 2008 - CBOE daily volume averaged 4.65 million contracts traded per day, up 23 percent when compared to the 3.8 million contracts daily during March 2007. Total exchange volume during the month rose 12 percent to 92,953,594 contracts, up from March 2007 volume of almost 83 million contracts.[10]
  • February 2008 - Trading volume totaled 78.7 million contracts, an increase of 28.4 percent over February 2007 volume of 61.3 million contracts. Average daily volume for the month was 3.9 million contracts.[11]
  • January 2008 - January 2008 was the busiest month in CBOE's history as trading volume rose 81 percent to 110.8 million contracts (average daily volume - 5.3 million), up from January 2007 volume of 61.3 million contracts (average daily volume - about 3.1 million). This month surpassed the previous high of 105.6 million contracts traded in August 2007.[12]

Financials

  • The CBOE in early April 2008 reported record revenues and earnings for the three-month period ending March 31, 2008. This was the ninth consecutive quarter of year-over-year, double-digit gains for CBOE. Pre-tax profits totaled $52.8 million for the first quarter, a 74-percent increase over $30.3 million for the same period a year ago. The net income for the first quarter was $30.6 million compared to $17.6 million for first-quarter 2007, also up 74 percent. Record quarterly revenues totaled $104.3 million versus $77.8 million during first-quarter 2007, a 34-percent revenue increase. Higher trading volume during the quarter translated into a 40-percent increase in revenues from transaction fees. The average daily volume for the first three months of 2008 totaled just more than 4.6 million contracts as compared to nearly 3.4 million contracts a year ago, a 37-percent increase.[13]


  • 2007 Full-Year results/Fourth Quarter 2007: On Jan. 30, 2008, CBOE released its 2007 full-year and fourth-quarter 2007 financials. For the year ended Dec. 31, 2007, total revenues grew 37 percent to a record $352.3 million for the full-year 2007, compared with $258.0 million in the prior year. Revenues for fourth quarter 2007 totaled $93 million, a 43-percent increase over 2006, on record trading volume of 258.8 million contracts.[14]

News

  • In June 2008, a CBOE seat, or membership, traded for a new all-time high of $3,300,000. [15]




  • On Sept. 27, 2007, CBOE began trading options on the CBOE Nasdaq-100 Volatility Index (VXN) and the CBOE Russell 2000 Volatility Index (RVX). These two new contracts expand the suite of volatility products offered exclusively at CBOE and the CBOE Futures Exchange (CFE). This brought to three the number of CBOE's volatility benchmarks, as VXN and RVX options joined the CBOE Volatility Index (VIX) options.
  • On Aug. 28, 2007, CBOE began trading Basket Credit Event Binary Options (Basket CEBOs). Two of these are based on specific industry sectors (automobile and homebuilder) and the third as a high-yield composite basket. Basket CEBOs are call options based on a basket of reference entities (the basket components). The options automatically pay out a cash amount each time a credit event is confirmed in any of the basket components during the life of the contract.

CBOE.org

The CBOE.org web site conveys information for CBOE members, member firms and lease holders - some of it restricted to those groups - and generally available public information: CBOE legal and regulatory matters, including CBOE's constitution,[19]disciplinary actions and rules,[20][21][22]rule filings and comment letters[23][24] application for membership;[25] overviews of CBOE Market-Maker/Remote Market Maker/e-DPM programs and other topics.

Chicago Board Options Exchange History

CBOE HISTORY TIMELINE [26]

The Beginning

Launched in April 1973, the Chicago Board Options Exchange was conceived of by the Chicago Board of Trade (CBOT), which was seeking new avenues to supplement revenues from flagging futures transactions. During early days of trading, volume averaged about 1,000 calls a day, and puts were not introduced for another four years. A year after launch, CBOE trading volume had grown 40-fold, allowing the exchange to move onto its own larger trading floor directly above the CBOT trading floor. In 1984, CBOE moved to its current 10-story building.

Product Additions

One of the most noteworthy milestones in CBOE's history was the launch of stock index options, which began in March 1983 with the exchange's first proprietary index, the CBOE-100 Index, later renamed the S&P 100 Index (OEX). Four months later, options trading on the S&P 500 Index (SPX) was launched.

Subsequent years saw creation of more new products and indexing tools, including:

CBOE Futures and Securities Exchanges

With multi-asset-class trading/investing an increasing part of the financial world, CBOE introduced two new affiliated exchanges:


Regulation

CBOE is regulated by the Securities and Exchange Commission (SEC), as is the CBOE Stock Exchange (CBSX). A wholly owned futures subsidiary of CBOE, the CBOE Futures Exchange (CFE) is regulated by the Commodity Futures Trading Commission (CFTC).

CBOE Annual Reports and Historical Statistical Data

References

  1. ↑ "Demutualization”. CBOE. Retrieved on May 24, 2008.
  2. ↑ "In the Catbird Seat". PIonline.com. Retrieved on November 5, 2007.
  3. ↑ "CBOE and CME Settle for $1 Billion". Chicago Tribune. Retrieved on June 4, 2008.
  4. ↑ "CME-CBOE Reach $1B Deal". Crain's Chicago Business News. Retrieved on June 4, 2008.
  5. ↑ Proposed Settlement of Exercise Right Litigation. CBOE. Retrieved on June 2, 2008.
  6. ↑ "Symbols Guide for Equity Options”. www.cboe.com. Retrieved on November 26, 2007.
  7. ↑ Press Release. www.cboe.com. Retrieved on June 4, 2008.
  8. ↑ Press Release. www.cboe.com. Retrieved on June 4, 2008.
  9. ↑ Press Release. cboe.com. Retrieved on June 4, 2008.
  10. ↑ "CBOE Average Daily Volume Climbs 23% In March; Average Daily Volume Of 4.6 Million, Total Volume Of 92.9 Million Contracts; Trading In Options On Exchange Traded Funds Grows By 42%”. CBOE. Retrieved on April 12, 2008.
  11. ↑ "CBOE February Volume Increases 28% TO 78.7 Million; ETF Volume Increases 72% Average Daily Volume AT 3.9 Million Contracts”. CBOE. Retrieved on April 12, 2008.
  12. ↑ Total Volume Of 110.8 Million Contracts Rose 81% Over January 2007, Average Daily Volume Of 5.3 Million Contracts During January Is New Record. CBOE. Retrieved on February 4, 2008.
  13. ↑ CBOE Announces Record Financial Results For First Quarter: Pre-tax Profits Increase 74%, Revenues Up 34%; Ninth Consecutive Quarter of Double-Digit Gains. CBOE. Retrieved on April 21, 2008.
  14. ↑ "CBOE Announces Record Results For 2007". CBOE. Retrieved on January 30, 2008.
  15. ↑ {{cite web|name=CBOE SEAT SELLS FOR NEW HIGH OF $3.3 MILLION; SECOND CONSECUTIVE DAY OF RECORD MEMBERSHIP PRICES|url=http://www.cboe.com/AboutCBOE/ShowDocument.aspx?DIR=ACNews&FILE=cboe_20080618.doc&CreateDate=18.06.2008.|org=CBOE|date=August 7, 2008}
  16. ↑ CBOE Seals Exclusive Agreement With 3D Markets For Benchmark-Priced Trades With "GWAP" Options Pricing. CBOE. Retrieved on May 24, 2008.
  17. ↑ CBOE and 3-D Markets Bring the GWAP to Options. Advanced Trading. Retrieved on June 4, 2008.
  18. ↑ CBOE Files For Approval Of Binary Options On Broad-Based Indexes: Binaries on S&P 500 Index (SPX) to Be Among First Listed. CBOE. Retrieved on May 24, 2008.
  19. ↑ "CBOE Constitution ”. CBOE. Retrieved on May 24, 2008.
  20. ↑ CBOE Rules. CBOE. Retrieved on May 24, 2008.
  21. ↑ CBOE Disciplinary Actions. Chicago Board Option Exchange. Retrieved on December 10, 2007.
  22. ↑ CBOE's Regulatory and Disciplinary Process. Chicago Board Options Exchange. Retrieved on December 10, 2007.
  23. ↑ "Regulatory Circulars”. CBOE. Retrieved on May 24, 2008.
  24. ↑ "Comment Letters”. CBOE. Retrieved on May 24, 2008.
  25. ↑ CBOE Membership Forms Library. CBOE. Retrieved on May 24, 2008.
  26. ↑ CBOE History. CBOE. Retrieved on May 24, 2008.

Resources

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