Chicago Board Options Exchange

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Chicago Board Options Exchange
Image:CboeLogo.jpg
Founded Apr. 26, 1973
Headquarters 400 S. LaSalle Street, Chicago, IL 60605
Key People William J. Brodsky, Chairman and CEO; Edward T. Tilly, Executive Vice Chairman; Mark F. Duffy, Vice Chairman; Edward Joyce, President and COO
Products Options on equities, equity indexes, ETFs (+futures and stock exchange)
Web site www.cboe.com

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 as of 2008 the largest of the seven 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 2009, CBOE listed options on 2,338 equities, on 15 broad-based and sector-based indexes (see CBOE index options), and on 244 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] The FIA report notes that the number of futures and options traded on CBOE dropped almost 5 percent over the year to 1.136 billion. The CBOE's S&P 500 options remained its strongest performing contract with almost 155 million traded but volume fell 13.5 percent on 2008.

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.

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


Contents

CBOE Business Model

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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 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.

On Oct. 21, 2008, CBOE announced it planned to spend $25 million on a new, separate, all-electronic options exchange called C2. The new exchange -- approved by the Securities and Exchange Commission on December 22, 2009 -- is now planned for launch in the fourth quarter of 2010 and eventually could offer all CBOE options contracts.[1] C2's launch was temporarily put on hold until fourth quarter 2010 in light of pending new rules for the U.S. financial markets. [2] hough it was not confirmed by CBOE, some people have assumed that the new exchange would implement a maker-taker pricing model, which also has been adopted by competing exchanges such as Boston Options Exchange, NYSE Arca and Nasdaq Options Exchange. However, CBOE has indicated that the final form of the new exchange may have different models for different products.

C2 platform

Demutualization

In January of 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.[3] 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.[4]

On June 2, 2008, it was reported that the CBOE and CME had, for an estimated $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.[5][6] [7] This settlement did not come to fruition, as 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.[8]

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.[9] The court's approval of the settlement moved the CBOE closer to a potential initial public offering.[10][11] By Aug. 28, the final day for appeal, several Chicago Board of Trade members had appealed the terms of a lawsuit settlement.[12]

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 $5billion.[13] [14]

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.[15]

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.[16]

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 memberships 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 plans to sell 9.6 million shares in the offering, with selling stockholders adding another about 2.1 million, according to a regulatory filing.[17]

The CBOE launched its IPO on June 15, 2010.[18] [19] The stock's initial public offering priced at $29 a share.[20] 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.[21]

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.[22]

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.[23] 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.[24] Brodsky also said CBOE should not be considered solely a target but also as a potential acquirer if consolidation in the exchange space continues.

Products

Options on Equities

More than 2,300 equity options are listed at CBOE (as of January 2009).[25]

Options on indexes

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.[26][27][28]

Index Product 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.[29] ISE, which vowed to appeal[30], 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.

In a statement from CBOE, CBOE Chairman and CEO William Brodsky, said "We are obviously gratified that the Court has ruled in CBOE's favor. After nearly four years of defending our contractual right to exclusively list and trade these index products, we are elated that the time, energy and resources needed for litigation may now be redirected to focus on new initiatives to better serve our customers and benefit our shareholders. No third party should be able to interfere with contractual licensing agreements. Nor should any exchange have a free ride on the enormous investment CBOE made in creating options on these indexes and in developing and marketing them for over two decades."

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 lie 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.

Awards

Index-Related Products

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, 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,[31] 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, in 2010 celebrating 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.

In September 2008, CBOE launched a "Short Sale Update" Web Page (http://www.cboe.com/ShortSale) to keep options traders, customers, and CBOE members fully informed on recently enacted restrictions on short sales.

CBOE Volume Highlights

  • 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.[32]


  • 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.[33]


  • 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.

Financials

  • 2008 Full-Year Results/Fourth Quarter 2008: Chicago Board Options Exchange (CBOE) on February 6, 2009, reported that its unaudited pre-tax profits totaled $38.2 million in fourth-quarter 2008, a 5-percent increase over the same period in 2007. Net income for the fourth quarter totaled $22.1 million, a 2-percent decrease compared with $22.6 million in the fourth quarter of 2007. Total revenues for the quarter rose 12 percent to $104.0 million, up from $93.0 million in fourth-quarter 2007. For the year ended December 31, 2008, CBOE achieved record earnings and revenues.Unaudited pre-tax profits grew 38 percent to a record $193.4 million over 2007 pre-tax profits of $140.0 million.Also for the full year, net income rose 38 percent to a record $114.8 million, from $83.2 million in 2007. Total revenues grew 20 percent to a record $423.8 million for the full-year 2008, compared with $352.3 million for 2007. [34]
  • 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.[35]

Chicago Board Options Exchange History

CBOE HISTORY TIMELINE [36]

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. [37]

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 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

Resources

Additional Resources

The CBOE Media Hub[38] 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" [39] - 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. ↑ Press Release. www.cboe.com. Retrieved on June 4, 2008.
  2. ↑ SEC Approves Chicago Board Options Exchange's C2 Platform. Dow Jones. Retrieved on January 5, 2010.
  3. ↑ "Demutualization”. CBOE. Retrieved on May 24, 2008.
  4. ↑ "In the Catbird Seat". PIonline.com. Retrieved on November 5, 2007.
  5. ↑ "CBOE and CME Settle for $1 Billion". Chicago Tribune. Retrieved on June 4, 2008.
  6. ↑ "CME-CBOE Reach $1B Deal". Crain's Chicago Business News. Retrieved on June 4, 2008.
  7. ↑ Proposed Settlement of Exercise Right Litigation. CBOE. Retrieved on June 2, 2008.
  8. ↑ "Summary of Terms of Settlement of Exercise Right Litigation, Aug. 20, 2008". CBOE. Retrieved on August 28, 2008.
  9. ↑ Approval of Exercise Right Litigation Settlement. CBOE. Retrieved on June 3, 2009.
  10. ↑ Ruling puts CBOE closer to flotation. The Financial Times. Retrieved on June 4, 2009.
  11. ↑ CBOE-CBOT settlement gets judge’s OK. Crain's Chicago Business. Retrieved on July 29, 2009.
  12. ↑ Appeals delay CBOE’s conversion effort. Crain's Chicago Business. Retrieved on Aug. 28, 2009.
  13. ↑ CBOE Weighs an IPO by May. The Wall Street Journal. Retrieved on December 3, 2009.
  14. ↑ Chicago Exchange Agrees Move. The Financial Times. Retrieved on December 3, 2009.
  15. ↑ CBOE press release. CBOE. Retrieved on December 10, 2009.
  16. ↑ CBOE Plans Nasdaq Listing. Wall Street Journal. Retrieved on April 29, 2010.
  17. ↑ Chicago Board Options Exchange Members Approve IPO. The Wall Street Journal. Retrieved on May 24, 2010.
  18. ↑ CBOE Holdings Shares Jump as IPO Raises $339 Million. Businessweek. Retrieved on June 15, 2010.
  19. ↑ Press Release. AP. Retrieved on June 15, 2010.
  20. ↑ CBOE Up More Than 13%. Fox Business. Retrieved on June 15, 2010.
  21. ↑ UPDATE 4-CBOE IPO prices at top of range, seen rising. Reuters. Retrieved on June 15, 2010.
  22. ↑ CBOE Holdings IPO Makes A Splash. Forbes. Retrieved on June 15, 2010.
  23. ↑ CBOE CEO on Going Public. CNBC. Retrieved on July 14, 2010.
  24. ↑ CBOE's Brodsky: No Pressure to Pursue Merger Talks. Dow Jones Newswires. Retrieved on July 14, 2010.
  25. ↑ "Symbols Guide for Equity Options”. www.cboe.com. Retrieved on November 26, 2007.
  26. ↑ Press Release. www.cboe.com. Retrieved on June 4, 2008.
  27. ↑ Press Release. www.cboe.com. Retrieved on June 4, 2008.
  28. ↑ What About the Valley after the Rally?. New York Times. Retrieved on June 19, 2009.
  29. ↑ Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires. Retrieved on July 12, 2010.
  30. ↑ Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires. Retrieved on July 12, 2010.
  31. ↑ Press Release. cboe.com. Retrieved on June 4, 2008.
  32. ↑ CBOE 2009 TRADING VOLUME EXCEEDS ONE BILLION CONTRACTS FOR SECOND STRAIGHT YEAR. CBOE. Retrieved on January 19, 2010.
  33. ↑ CBOE'S FIFTH STRAIGHT RECORD VOLUME YEAR: 1.19 BILLION OPTIONS (4.7 MILLION ADV) CONTRACTS CHANGE HANDS. CBOE. Retrieved on January 2, 2009.
  34. ↑ "CBOE ANNOUNCES RECORD FINANCIAL RESULTS FOR 2008; FOURTH QUARTER REVENUES UP 12%, PRE-TAX PROFITS UP 5%, NET INCOME DOWN 2%". CBOE. Retrieved on February 7, 2009.
  35. ↑ "CBOE Announces Record Results For 2007". CBOE. Retrieved on January 30, 2008.
  36. ↑ CBOE History. CBOE. Retrieved on May 24, 2008.
  37. ↑ CBOT Chairman Speaks at Business Leaders Program on Innovation. CBOT. Retrieved on December 31, 2008.
  38. ↑ CBOE Media Hub. CBOE. Retrieved on May 22, 2010.
  39. ↑ CBOE Media Hub "News and Views". CBOE. Retrieved on May 22, 2010.
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