Feeling Heat, CBOE Must Weigh Options
From the Monday, June 09, 2003 issue of Crain's Chicago Business
By Steven R. Strahler
The pending acquisition of the American Stock Exchange further exposes the competing Chicago Board Options Exchange as a potential takeover target — rather than a possible acquirer — as the options industry nears a long-anticipated consolidation.
Though by no means a done deal, a $110-million bid announced last week by Chicago private-equity firm GTCR Golder Rauner LLC for the American Stock Exchange (Amex) trumped a merger offer from the once-dominant, now-struggling Chicago Board Options Exchange (CBOE).
The CBOE is pinning its survival hopes on the introduction this week of a trading system aimed at recapturing business lost to other exchanges, mainly the New York-based, all-electronic International Securities Exchange (ISE). But as the CBOE barely clings to its No. 1 status in a business it pioneered 30 years ago — listed equity options trading — Chairman and CEO William Brodsky remains on the hot seat.
Some directors and floor traders predict he'll be gone before too long, maybe by the end of next year, when his contract is said to expire.
The 59-year-old Mr. Brodsky, an Amex alum who joined the CBOE in 1997 from the No. 2 post at the Chicago Mercantile Exchange, declines to discuss his contract, other than to reject any thought of leaving. "I love my job — or I'm crazy," he quips. "Right now, I'm happy here."
Leadership liabilities
He is portrayed as a reluctant leader, frustrated by exchange politics and strategic prospects, and needing to be prodded, say detractors, into new ventures, like the "hybrid" trading system combining computer- and pit-based execution capabilities.
"He's waffled," contends Kevin Keller, founder of the Chicago Market Makers Assn., formed two years ago to represent the threatened interests of independent floor traders. "By not being a leader, we've been left behind. Now, he's on the right page with hybrid."
Likewise, the major force for consolidation of the nation's five options exchanges (which threatens management jobs) has come from cost-conscious members like New York-based Goldman Sachs & Co.'s derivatives unit and Pennsylvania's Susquehanna Investment Group. Mr. Brodsky dismisses such talk.
One director says Mr. Brodsky's employment agreement was extended last year on the assumption that the member-owned CBOE would soon be merged, or at least converted to a for-profit corporate structure, setting the stage for new management.
Critics say he is better at — and relishes the limelight of — being the CBOE's public face in Washington, D.C., and elsewhere, and would love nothing more than to be bailed out of his predicament with a political appointment, such as heading the Securities and Exchange Commission (SEC). Mr. Brodsky's job security, according to directors, is enhanced by the challenge of finding a successor at the right price. His contract is believed to pay him close to $1 million annually, with a bonus of up to half that much.
But as the CBOE pared its staff positions by 160, to 720 — with more layoffs probable — bonuses were omitted for the fiscal year ended last June. The board has yet to decide about this year's overall bonus policy, says a director.
Mr. Brodksy says the exchange is profitable again after losing $5.6 million during fiscal 2002. But volume continues to decline, down 4% during the first 11 months of the current fiscal year after falling 14%, to 319 million contracts, in fiscal 2002.
The CBOE's once-absolute marketshare has dwindled to 30.8%, from 40.5% two years ago, as the 3-year-old ISE closes in, with 27.1%, according to Options Clearing Corp. data. The Amex is third with 20.9% in May. (Though the nation's second-oldest stock exchange, the Amex now derives about half of its volume from options.)
CBOE's seat price has rebounded slightly since last summer's low, but, at $170,000, is a far cry from 1998's record $735,000.
"It's a very difficult business today," acknowledges CBOE director Robert Birnbaum, a Brodsky loyalist and former Amex president. "People are not going to be happy."
Another threat to the CBOE, paradoxically, is its thriving business in index options — exclusive franchises that track baskets of stocks. Without them, the CBOE would already have surrendered its volume crown to the ISE, which has petitioned the SEC to end such monopolies.
Hopes for hybrid
Not if Mr. Brodsky has his way. "If we have to, we'll go to the Supreme Court of the United States. We will fight tooth and nail — and then some," he says.
The point-and-click hybrid system, which he says "could transform this place, which could cause our marketshare to grow, without any consolidation," promises tighter bid-ask spreads by replicating on computer screens the full market-making power of the floor's "crowd."
"They think it's going to significantly enhance their position," says Mr. Birnbaum. "I hope they're right. We're going to find out."
©2003 by Crain Communications Inc. |
