nhl baby jerseys A merger in CBOE’s future

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It was barely noted in a financial world alive with mergers, acquisitions, partnerships and other deal making, but it could signal the start of something new.

Putting years of legal wrangling behind them, CME Group Inc. and rival Chicago Board Options Exchange agreed this month to jointly develop new volatility indexes.

“CME is obviously No. 1 on the list. It the most logical fit,” said Fred Grede, a veteran exchange executive and consultant. “But it always gets back to the price.”

In fact, the plan unveiled last week for a public offering of the CBOE is no sure thing. Exchange valuations have fallen sharply in recent years, and the Chicago options mart is in one of the most competitive niches. CBOE members need to vote in favor of the plan before it can proceed.

Industry insiders say it likely the exchange will go through with an IPO by the end of June, before making any merger deal, as did the Chicago Board of Trade and New York Mercantile Exchange before they were purchased by CME. Otherwise, setting a price would be difficult with so many risks to consider. Reported estimates of the CBOE value have varied wildly, from a realistic $2 billion to a wishful thinking $5 billion. options trading in 2009 from 45 percent in 2000. Earnings were down last year from 2008, even after the exchange booked $24 million in access fees deferred from the prior two years.

Almost one third of its transaction fees came from a single product, options on the Standard Poor 500, which alone accounted for more than 90 percent of the dollars generated by its exclusively listed indexes.

Most of the CBOE volume comes from contracts also listed on competing exchanges, which reduces what the exchange can charge. Lately, competitors have started to award rebates for orders that provide liquidity, stepping up the pressure on others to pay for order flow.

On the plus side, CBOE remains a dominant player in an industry that has expanded dramatically over the years, important considerations for any buyer. Relatively few stock traders use options, providing a big opportunity,
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said CBOE Chairman William Brodsky. “The potential audience continues to grow.”

Beyond that, the CBOE S 500 isn fully electronic yet, and volume at other exchanges has shot up when top contracts were computerized. Once it eliminates its membership structure ahead of its public offering, CBOE can raise additional revenue by selling trading rights as well.

The exchange also brings a track record of new product development, reflected in its licensing deal with CME for indexes based on the ups and downs of various markets.

NYSE Euronext Inc., parent of the New York Stock Exchange and the American Stock Exchange options mart, is pushing hard to expand its derivatives trading. It watches CBOE closely.

“They been extremely patient,” said Duncan Niederauer, chief executive at NYSE Euronext. “Now we see how the market wants to value the asset.”

CBOE officials spent years clearing the way for the IPO before finally settling a protracted dispute over trading rights in 2009. At the Futures Industry Association meeting in Florida last week, they were mostly silent about their plans, and Brodsky would not comment about the offering. But they were visible, at one point sponsoring a speaker who pushed the idea that exchange mergers promote the public good.

“It terribly important to have order flow consolidated to get the best price,” said Robert Schwartz, a finance professor at Baruch College in New York. “I like consolidation.”

It remains to be seen if any would be acquirers will like the CBOE enough to buy it.

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