(Adds comments on demutualization, trading activity and sector competition)
By Jacob Bunge Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- The Chicago Board Options Exchange is hoping for a ruling on its demutualization case within the next two to four weeks, its chief executive said Tuesday.
A Delaware judge will decide on a mid-December objection from Chicago Board of Trade members that postponed yet again the CBOE's quest to demutualize, a process that has taken two and a half years.
William Brodsky, the CBOE's chairman and CEO, said he was "cautiously optimistic" that the judge would rule in favor of the Chicago-based options exchange, noting that the judge had no questions about the terms of the deal.
"There's a light at the end of the tunnel," Brodsky said, speaking at a luncheon presentation.
The case remains the final hurdle for the CBOE as it moves toward shareholder ownership from its current member-owned status, which would allow the CBOE to pursue an initial public offering or a merger.
Brodsky declined to comment on which path CBOE would ultimately choose, but noted that other exchanges like the CBOT and the International Securities Exchange let the public markets decide how much the company was worth before entering merger deals.
Under the terms of the settlement, about 1,000 CBOT members would receive an 18% equity stake in a demutualized CBOE, as well as $300 million in cash. The CBOT established the CBOE in 1973; CBOT is now part of CME Group Inc. (CME).
CBOE officials stressed that they don't know when the chancery court judge in the case, John Noble, will make a final ruling. If the CBOE receives a favorable ruling, the options exchange will still have to wait out a 30-day period during which the decision could be appealed to the Supreme Court of Delaware.
That, however, would be "the last stop" for the case, Brodsky said, adding that he believed such an appeal would be resolved within a year.
Not being a publicly traded exchange has its charms, following a year that has seen the sector pummeled as the financial crisis brought low some of the exchanges' biggest customers, like investment banks and hedge funds.
Brodsky acknowledged that the CBOE has had "a bit of luck" avoiding the market turmoil, though the CBOE has seen the value of its seats fall to $1.8 million in mid-December from $3.1 million at the beginning of 2008. With about 930 members, that puts the CBOE's current value at roughly $1.67 billion, down from $2.9 billion a year ago.
Yet the CBOE, which reports financials as though it were a public concern, said that the third quarter of 2008 was its best ever, with net income up 56% to $35.4 million and revenue up 24% to $120 million.
The CBOE last week reported that 2008 was its busiest year in history, with 1.2 billion contracts traded, up from 944.5 million in 2007 and surpassing the 1 billion mark for the first time.
Brodsky offered a tempered outlook on 2009 trading activity, noting five years of year-on-year volume gains at CBOE and that "nothing goes up forever."
While a slowdown among CBOE's hedge fund customers is expected, Brodsky saw continued strength from retail investors and said that CBOE is reaching out to this group through educational efforts.
CBOE will also look to attract more high-frequency traders through a new electronic options exchange tentatively named C2, which will pit CBOE against NYSE Euronext (NYX) and Nasdaq OMX (NDAQ), which offer multiple trade execution venues under a single exchange holding company.
C2 may employ a so-called "maker-taker" platform, similar to NYSE Arca and Nasdaq Options Market, in which customers that take liquidity from the market pay a fee and liquidity providers are rewarded for making markets.
Launching C2 depends on CBOE securing a new exchange license from the Securities and Exchange Commission, which CBOE Executive Vice Chairman Edward Tilly said is "not given freely or easily."
Meanwhile, Tilly said that CBOE is working with members to define trading rules and develop a matching algorithm, adding that C2 could be up and running by September.
CBOE will face stiff competition in 2009 from NYSE Euronext, which is targeting a 20% to 25% market share for options trading, according to CEO Duncan Niederauer.
Following its acquisition of the American Stock Exchange, NYSE Euronext holds a second options exchange license, with which the exchange plans to launch a new market in 2009.
Brodsky said that CBOE's singular focus on options puts it in a solid position to compete against the New York adversary, which operates multiple markets in equities and derivatives.
"We're focused on options," he said. "This is what we do."
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com
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Publié le 06 janvier 2009 Copyright © 2009 Dowjones