Will the CBOE be next to the alter?
CBOE merger, sale talk heats up
Merc-Board of Trade deal puts new focus on options exchange
By Susan Diesenhouse
Tribune staff reporter
Published October 19, 2006
Speculation that the CBOE, the nation's largest options exchange, will be purchased or merged with another financial marketplace has intensified since Tuesday's announcement that the city's two other big exchanges plan to pair up.
The Chicago Mercantile Exchange's $8 billion deal to buy the Chicago Board of Trade would make the $25 billion CME Group Inc. the world's largest futures exchange. Having such a dominant financial market here, investors and traders say, will focus the financial world's attention on the value of acquiring or merging with Chicago's third big exchange, the Chicago Board Options Exchange.
This week, "the CBOE's value has increased dramatically," said Jon Najarian, a co-founder of OptionsMonster.com, a financial information service.
Part of the CBOE's allure is that "it offers everything: options, futures and soon stocks," added Najarian, whose firm is a member of the CBOE, Board of Trade and New York Stock Exchange.
In the 1970s the Board of Trade created the options exchange as a venue for trading contracts based on equities. Those agreements give the holder the right, or option--but not the obligation--to buy or sell a stock at a set price before a set time. In contrast, a futures contract is an obligation to sell at a set time and set price.
On Wednesday, a seat on the CBOE sold for a new high price of $1.505 million, $120,000 more than just a week before the Merc's acquisition announcement. The high price for a CBOE seat has jumped 72 percent this year. In 2001, the best seat price was $400,000, according to the Options Clearing Corp., an industry clearinghouse.
The rising value placed on the options exchange has been fueled by a number of factors. As various financial exchanges have gone public, investors have plunged in with a frenzy, driving up share prices. They expect the same to occur at the CBOE, if it decides to become a for-profit corporation and sell stock to the public.
At the same time, the options business has become one of the fastest-growing sectors of the U.S. securities industry.
Meanwhile, the CBOE's own performance has been on an upswing. The average daily volume of contracts it traded so far in 2006 is 2.6 million, up almost 50 percent from a year earlier. That brought its market share of trading in U.S. listed options to 33.65 percent so far this year, up from 31.13 percent in 2005.
But most important, the combination of the Merc and the CBOT makes it more likely that the Board of Trade will resolve a long-standing trading rights dispute with the options exchange, said Ryan Caldwell, portfolio manager of the Asset Strategy Fund of Waddell & Reed Inc. in Kansas City, Kan.
"I think this deal will motivate the CBOT to clean up the issue faster," he said.
In August, the Board of Trade filed a lawsuit to assure that if the CBOE becomes a for-profit corporation or is sold, Board of Trade members will retain whatever trading rights and ownership stake they believe was granted to them in the 1970s when the Board of Trade spun off the CBOE. The suit is pending.
Now more measured negotiations may be in order.
In the summer, "The CBOT was hunkering down for a fight," Caldwell said. "But that's no longer in their interest because closing the deal with the CME is far more important."
Not only is the trading rights battle a distraction, it may damage CME's future plans to bring the CBOE into its orbit, said Tony McCormick, a vice president for equities and options trading at Charles Schwab & Co.
Until the trading rights issue is resolved, it is unclear whether Board of Trade members have an ownership stake in the options exchange and if so, exactly how much.
Once the trading rights issue is resolved, the CBOE can proceed with plans to convert to a for-profit stock corporation from a member-owned non-profit. That paves the way for it to do a public stock offering if it chooses. Then Wall Street will be able to measure its value as reflected in the stock price. That gives the CBOE a currency for merging or being acquired by another exchange.
For the potentially mammoth CME Group, the CBOE could be a tasty treat, said McCormick.
"It offers the CME Group something new as the third member of the Chicago triumvirate," he said. "It allows them to enter the equity and equities derivative world."
In July, the CBOE announced plans for a new equities market for trading products offered on the New York Stock Exchange, the Nasdaq stock market and the American Stock Exchange.
Should the Merc/Board of Trade pair view the CBOE as a future takeover target, said McCormick, "Business logic dictates that they peacefully resolve a dispute with a potential partner."
----------
sdiesenhouse@tribune.com
Copyright © 2006, Chicago Tribune
chicagotribune.com |
