Chicago Board Options Exchange

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Chicago Board Options Exchange
CBOE.jpg
Founded Apr. 26, 1973
Headquarters 400 S. LaSalle Street, Chicago, IL 60605
Key People William J. Brodsky, Chairman and CEO; Edward T. Tilly, President and COO
Products Options on equities, equity indexes, ETFs (+futures and stock exchange)
Twitter CBOE
StockTwits CBOE
LinkedIn 8805
Facebook CBOE
Corporate Website www.cboe.com
Releases Company News

The Chicago Board Options Exchange (CBOE) was founded in April 1973 as the first U.S. options exchange offering standardized, listed options. CBOE, where for the first time in 2008 more than one billion contracts were traded, was at the end of 2011 the largest of the nine U.S. options exchanges in total volume and market share.

The CBOE's parent company, CBOE Holdings Inc., went public on June 15, 2010, at a share price of $29.[1]

As of the end of 2011, CBOE listed options on 2,795 equities, on 12 cash indexes (see CBOE index options), and on 275 ETFs, among other products. Chicago Board Options Exchange ranked as the world's fifth-largest derivatives exchange by contract volume in 2009, according to the annual Futures Industry Association's survey of the world's leading derivatives exchanges. [2] CBOE recorded its fourth straight year of volume over one billion contracts in 2011 with 1.15 billion contracts traded.

The CBOE's S&P 500 options are its strongest performing contract. The options hit an all-time volume record of 197.5 million contracts (just under 785,000 contracts/day average) in 2011. In 2012, average daily volume in the contracts was nearly 700,000, making it the most heavily traded index product. The biggest winner at CBOE in terms of a percentage increase during 2011 was CBOE VIX options. With 98.0 million contracts traded, contract volume was up 57 percent over 2010.[3]

Trading at CBOE is carried out by way of the exchange's Hybrid system, which enables customers to choose whether to have their transactions handled 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.

Contents

CBOE Business Model

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

The CBOEdirect 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 (now CBOE Holdings, Inc.) launched three 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.

C2 platform

On Oct. 29, 2010, CBOE launched a new, separate, all-electronic options exchange called C2 Options Exchange. CBOE first announced its plans to spend $25 million on the new electronic exchange on Oct. 21, 2008. The new exchange was approved by the Securities and Exchange Commission on December 22, 2009. At Dec. 31, 2011, C2 offered trading in 307 equity option, 50 ETF option and one index option contracts.

C2 launched an electronically traded, p.m.-settled S&P 500 Index options (symbol: SPXpm) on October 4, 2011. [4] [5] The exchange has adopted a maker-taker pricing model, similar to that offered by competing exchanges such as Boston Options Exchange, NYSE Arca and Nasdaq Options Exchange.

CBOE Holdings announced that on February 19, 2013, pending regulatory approval, it will transition the SPXpm product from the C2 Options Exchange to the Chicago Board Options Exchange, where it will be traded on CBOE's hybrid trading model. Its flagship SPX option, which is a.m.-settled, continues to trade in CBOE's open outcry environment.[6]

CBOT Exercise Rights and CBOE Demutualization

In January of 2006, in anticipation of 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 was amended (updated) in May 2007 and May 2008.[7] Demutualization would require regulatory approval and an affirmative vote of CBOE membership.

One of the provisions of the initial charter that created the CBOE was to allow each full member of the CBOT to exercise its right to trade at the CBOE. These exercise rights, while important in the creation of the CBOE and as a source of early liquidity providers for its products, became a major issue as the exchanges moved from member-owned organizations to demutualized entities. Not only was determining the value of the exercise right a complex endeavor, but some members did not wish to dispense of their trading rights.[8]

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.[9]

In June of 2008 the CBOE and CME settled the nearly two-year long lawsuit that had prevented the CBOE from pursuing demutualization for an estimated $1 billion. The settlement gave full CBOT members 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.[10][11] [12] This settlement did not come to fruition either, because CBOT members disagreed over who should receive the settlement. More than two months later, on Aug. 20, a definitive agreement was struck, pending CBOE membership vote, which broadened the requirements for those to receive an 18 percent stake in the CBOE and/or a cash settlement.[13]

On June 3, 2009, it was announced that the Delaware Chancery Court had approved the settlement of the exercise right litigation. In approving the proposed settlement, the court overruled all of the objections to the terms of the settlement and found that the settlement is fair and reasonable. The court's decision remained subject to potential appeal to the Delaware Supreme Court, and on July 29 the 30-day window for appeal officially began with the entry of a "final implementing order." The deadline for appeals was Aug. 28, 2009.[14] The court's approval of the settlement moved the CBOE closer to a potential initial public offering.[15][16] By Aug. 28, the final day for appeal, several Chicago Board of Trade members had appealed the terms of a lawsuit settlement.[17]

On Nov. 29, 2009, CBOE announced a settlement of the appeals in which the exchange would pay the CBOT members $4.2 million, bringing it closer to a possible IPO or buyout by a larger exchange. Estimates valued the CBOE at $3 billion to $5 billion.[18] [19]

Initial Public Offering

On Dec. 10, 2009, the CBOE's board of directors approved plans to pursue an initial public offering, saying that they intended for the demutualization and the IPO to take place concurrently, by the end of the second quarter of 2010.[20]

In April of 2010, the CBOE announced that it planned to list its shares on the Nasdaq Stock Market as the exchange advanced toward an initial public offering (IPO) planned for mid-June.[21]

On May 21, 2010, the CBOE announced that the exchange’s membership had overwhelmingly approved CBOE’s planned demutualization, clearing the way for an IPO. In a special meeting of the membership, 870 votes were cast in favor of the proposed restructuring transaction, with 34 votes against the proposal and no abstentions. As a result, the demutualization was approved by 96.2 percent of the CBOE membership that voted, which represents 89.6 percent of the CBOE memberships entitled to vote. Approval by a majority of the outstanding memberships entitled to vote was required to approve the demutualization.

CBOE planned to sell 9.6 million shares in the offering, with selling stockholders adding another about 2.1 million, according to a regulatory filing.[22]

The CBOE launched its IPO on June 15, 2010.[23] [24] The stock's initial public offering priced at $29 a share.[25] That pricing of shares was at the top of the expected range, signaling investor demand in what has been a rocky market for new U.S. issues. The CBOE sold 11.7 million shares for $29 each, raising about $339 million, according to a market source. It had planned to sell 11.7 million shares for $27 to $29 each.[26]

The CBOE had a smaller market capitalization than some of its rival exchanges, potentially making it a buyout target. CBOE has a market capitalization near $500 million, while the CME Group, by comparison, has a market cap of $20.5 billion.[27]

Chairman and CEO William Brodsky, in a CNBC interview conducted on July 14, 2010, said an independent CBOE does not feel pressure to merge with a larger company.[28] Brodsky's comments came amid analyst speculation that the options exchange is a takeover target even as its IPO, held up for a year over a legal dispute, was well-received. NYSE Euronext, CME Group, IntercontinentalExchange, Hong Kong Exchange, and Brazil's BM&F Bovespa had been noted by analysts as potential buyers at the time of the Brodsky interview.[29] Brodsky also said CBOE should not be considered solely a target but also as a potential acquirer if consolidation in the exchange space continues.

In a July 26, 2010, interview with Bloomberg, Brodsky said that growth and profitability can be achieved without a merger partner.[30] Brodsky linked growth prospects to the expansion of VIX products. "In some places CBOE is better known by VIX than by our own name," Brodsky said in the Bloomberg interview. "There will be other VIX-like products that we hope will trade in different countries and on different exchanges. That will add to our profitability over time."[31]

Products

Options on Equities

As of Dec. 31, 2011, CBOE listed 2,795 equity options .[32]

Index-Related Products

As of Dec. 31, 2011, CBOE listed 12 cash index options for trading. CBOE as early as 1983 began to establish exclusive licensing agreements with Standard & Poor's to offer stock 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 for its index product development and as the creator of volatility products.[33][34][35]

In March of 2013, CBOE Holdings renewed their exclusive license agreement with S&P Dow Jones Indices to list the S&P 500 index options contract (SPX) until 2031, with non-exclusive listing rights through 2033.[36]

Full Listing of CBOE index options

Full Listing of CBOE ETFs and HOLDRS

Legal Issues

In July of 2010, an Illinois court ruled in favor of CBOE in a nearly four-year dispute with International Securities Exchange, a unit of Frankfurt-based Deutsche Börse AG.[37] ISE, which vowed to appeal[38], had sought to list options contracts exclusively licensed by CBOE, such as those on the Standard & Poor's 500-stock index and the Dow Jones Industrial Average.

On May 13, 2013, the U.S. Supreme Court refused the appeal by the ISE.[39] Since there is no appeal beyond the U.S. Supreme Court in the United States this puts an end to this particular piece of litigation.

In a statement from CBOE, CBOE Chairman and CEO William Brodsky, said "We are vindicated after more than six years of lengthy and unnecessary litigation that the highest Court in the land has validated our position and the intellectual property rights of index providers. We are deeply gratified to no longer have to defend against those who would free ride on our investment in innovation and the intellectual property of others. We are elated to have achieved finality on this critical issue."[40]

By way of history, in November 2006, the ISE sought a judgment in New York that would let it offer its own contracts on the S&P 500 and Dow Jones Industrial Average without securing licenses from the index developers. ISE argued that the value of the indexes lies in the public domain. The exchange also argued that multiple listings would lower investor costs.

CBOE responded to ISE's November 2006 action with its own lawsuit in Illinois state court, joined by McGraw-Hill Cos. and Dow Jones & Co., then the respective owners of the S&P 500 and the DJIA.

In 2012, the CBOE sued the ISE for at least $525 million, accusing its rival of infringing three patents related to an automated options trading system. In a complaint filed in the U.S. District Court in Chicago, the CBOE said the patents were issued in 2008, 2011 and 2012, and cover systems to monitor quote risk and automatically adjust quotes when risk exposure gets too high.[41]

Awards


CBOE Executives

Technology

In 2003, CBOE introduced the CBOE Hybrid Trading System. 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. In the electronic environment, CBOE Hybrid aims to provide 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,[42] 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;
  • 2010 - CBOE introduces its new front end, Pulse. The technology is the first product to emerge from Signal Trading Systems, a joint venture between CBOE and FlexTrade Systems.[43]

CBOE Educational Efforts

The Options Institute, which in 2010 celebrated its 25th anniversary, is the educational arm of CBOE. The Options Institute 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

  • 2012 Trading Volume Totals - CBOE reported that 2012 consolidated trading volume for options contracts on Chicago Board Options Exchange and C2 Options Exchange and futures contracts on CBOE Futures Exchange totaled 1.13 billion contracts. Average daily volume (ADV) in 2012 was 4.54 million contracts, down six percent from 4.83 million contracts traded in 2011. [44]
  • 2011 Trading Volume Totals - CBOE reported that 2011 trading volume exceeded one billion contracts for the fourth consecutive year, with 1.15 billion contracts traded versus 1.115 billion contracts in 2010. CBOE average daily volume (ADV) in 2011 was 4.6 million contracts, up three percent from 4.4 million contracts per day in 2010. "CBOE index options volume" totaled 320.1 million contracts versus 270.0 million in 2010. Cash index options ADV was 1.27 million contracts, up 19 percent from 2010 ADV of nearly 1.1 million contractss. CBOE equity options volume totaled 497.0 million contracts versus 571.3 million in 2010. ADV in 2011 was just under 2.0 million contracts, down 13 percent from ADV 2.3 million contracts in 2009. CBOE ETF options volume totaled 335.1 million contracts versus 274.2 million in 2010. ADV in 2011 was 1.3 million contracts, up 22 percent from ADV 1.1 million million contracts in 2010.[45]
  • 2010 Trading Volume Totals - CBOE reported that 2010 trading volume exceeded one billion contracts for the third year in a row, with 1.115 billion contracts versus 1.134 billion in 2009. ADV in 2010 was 4.4 million contracts, down two percent from the 2009 ADV of 4.5 million contracts. CBOE index options volume totaled 270.0 million contracts versus 222.8 million in 2009. ADV in 2010 was nearly 1.1 million contracts, up 21 percent from ADV 884,000 contracts in 2009. CBOE equity options volume totaled 571.3 million contracts versus 634.7 million in 2009. ADV in 2010 was 2.3 million contracts, down ten percent from ADV 2.5 million contracts in 2009. CBOE ETF options volume totaled 274.2 million contracts
  • 2009 Trading Volume Totals - The Chicago Board Options Exchange (CBOE) reported that 2009 trading volume exceeded one billion contracts for the second consecutive year. More than 1.13 billion contracts changed hands in 2009, a five-percent decline from the record 1.19 billion contracts traded in 2008. Average daily volume (ADV) in 2009 was 4.5 million contracts, down five percent from 2008 ADV of 4.7 million contracts. Equity options trading at CBOE set an annual volume record in 2009 of 634.7 million contracts, up five percent over 2008 volume. December 2009 volume was a record for any December at CBOE. Trading volume totaled 91.9 million contracts (ADV of 4.2 million contracts) for the month, up 26 percent from December 2008.[46]
  • 2008 Trading Volume Totals - The Chicago Board Options Exchange (CBOE) announced that 2008 was the busiest ever in its 35-year history as 1,193,355,070 contracts changed hands, a 26-percent increase over the 944,471,924 contracts traded in 2007. Average daily volume (ADV) of 4.7 million contracts beat 2007’s 3.8-million-contract ADV by 25 percent and capped off CBOE’s fifth consecutive year of record trading. During December, CBOE trading volume totaled nearly 73 million contracts, a one-percent rise over December 2007. Average daily trading volume for the month dropped eight percent to 3.3 million contracts.[47]
  • 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.

Chicago Board Options Exchange History

CBOE History Timeline [48]

Launched on Apr. 26, 1973, the Chicago Board Options Exchange was created by the Chicago Board of Trade (CBOT), which was seeking new avenues to supplement revenues from flagging futures transactions. CBOT leaders began in the late 1960s attempting to find a market that would diversify its traditional agricultural futures product line. In 1969, the idea was born to apply the principles of the CBOT's commodity futures markets to securities options. Until then, securities options prices were usually obtained by word of mouth or from the newspapers. The original idea was written on the back of a napkin by then-CBOT vice chairman Ed O'Connor during a dinner with then-Chairman Bill Mallers and President Henry Hall Wilson. It took years of research, work, and finding backing from people who could overcome exchange and government opposition. [49]

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 at 400 South LaSalle in Chicago.

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 (now CBOE Holdings, Inc.) introduced three 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

Resources

Additional Resources

The CBOE Media Hub[50] was designed in 2010 to meet the informational needs of the working press. Much of the information is organized by topics on which CBOE offers expertise: market regulation, market volatility, products and strategies. Reporters can find CBOE "News and Views" [51] - multi-media releases, which go beyond traditional news releases - and links to other frequently used resources, all in a press-friendly format that includes embeddable videos, photos and charts.

CBOE "Quick Links" include all CBOE press releases, bios/photos of CBOE executives, exchange communications, historical trading volume, CBOE history, op-eds/articles, press kits and a link to CBOE-TV.

References

  1. ↑ CBOE Holdings Shares Jump as IPO Raises 339 Million. Businessweek.
  2. ↑ 2009 Annual Volume Survey. FIA magazine.
  3. ↑ Press Release. CBOE.
  4. ↑ Press Release. www.cboe.com.
  5. ↑ SEC Approves Chicago Board Options Exchange's C2 Platform. Dow Jones.
  6. ↑ C2 - SPXpm Micro Site. Chicago Board Options Exchange.
  7. ↑ "Demutualization”. CBOE.
  8. ↑ CBOE settles exercise right settlement appeal. Futures Magazine.
  9. ↑ "In the Catbird Seat". PIonline.com.
  10. ↑ "CBOE and CME Settle for $1 Billion". Chicago Tribune.
  11. ↑ "CME-CBOE Reach $1B Deal". Crain's Chicago Business News.
  12. ↑ Proposed Settlement of Exercise Right Litigation. CBOE.
  13. ↑ "Summary of Terms of Settlement of Exercise Right Litigation, Aug. 20, 2008". CBOE.
  14. ↑ Approval of Exercise Right Litigation Settlement. CBOE.
  15. ↑ Ruling puts CBOE closer to flotation. The Financial Times.
  16. ↑ CBOE-CBOT settlement gets judge’s OK. Crain's Chicago Business.
  17. ↑ Appeals delay CBOE’s conversion effort. Crain's Chicago Business.
  18. ↑ CBOE Weighs an IPO by May. The Wall Street Journal.
  19. ↑ Chicago Exchange Agrees Move. The Financial Times.
  20. ↑ CBOE press release. CBOE.
  21. ↑ CBOE Plans Nasdaq Listing. Wall Street Journal.
  22. ↑ Chicago Board Options Exchange Members Approve IPO. The Wall Street Journal.
  23. ↑ CBOE Holdings Shares Jump as IPO Raises $339 Million. Businessweek.
  24. ↑ Press Release. AP.
  25. ↑ CBOE Up More Than 13%. Fox Business.
  26. ↑ UPDATE 4-CBOE IPO prices at top of range, seen rising. Reuters.
  27. ↑ CBOE Holdings IPO Makes A Splash. Forbes.
  28. ↑ CBOE CEO on Going Public. CNBC.
  29. ↑ CBOE's Brodsky: No Pressure to Pursue Merger Talks. Dow Jones Newswires.
  30. ↑ CBOE Can Grow Without Merger Partner, Brodsky Says. Bloomberg.
  31. ↑ CBOE Can Grow Without Merger Partner, Brodsky Says. Bloomberg.
  32. ↑ "Symbols Guide for Equity Options”. www.cboe.com.
  33. ↑ Press Release. www.cboe.com.
  34. ↑ Press Release. www.cboe.com.
  35. ↑ What About the Valley after the Rally?. New York Times.
  36. ↑ CBOE Holdings And S&P Dow Jones Indices Extend Licensing Agreement Through 2033. press release.
  37. ↑ Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires.
  38. ↑ Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires.
  39. ↑ Supreme Court Denies ISE Appeal On Index Options Dispute. Dow Jones Newswires.
  40. ↑ CBOE Wins in S&P Index Dispute. CBOE.
  41. ↑ CBOE sues ISE for $525 mln over options trading system. Reuters.
  42. ↑ Press Release. cboe.com.
  43. ↑ CBOE Unveils New Front End. Traders Magazine.
  44. ↑ CBOE Holdings Reports 2012 Consolidated Trading Volume. CBOE Holdings.
  45. ↑ Press Release. CBOE.
  46. ↑ CBOE 2009 TRADING VOLUME EXCEEDS ONE BILLION CONTRACTS FOR SECOND STRAIGHT YEAR. CBOE.
  47. ↑ CBOE'S FIFTH STRAIGHT RECORD VOLUME YEAR: 1.19 BILLION OPTIONS (4.7 MILLION ADV) CONTRACTS CHANGE HANDS. CBOE.
  48. ↑ CBOE History. CBOE.
  49. ↑ CBOT Chairman Speaks at Business Leaders Program on Innovation. CBOT.
  50. ↑ CBOE Media Hub. CBOE.
  51. ↑ CBOE Media Hub "News and Views". CBOE.
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