From the September 01, 2006 issue of Futures Magazine • Subscribe!

CBOE takes on New York

When New York Stock Exchange (NYSE) Chairman John Thain visited the Chicago Board Options Exchanges (CBOE) last fall he expressed praise and a little envy of the CBOE’s hybrid trading model. It would have been hard to predict at the time that less than a year later the two exchanges would be positioned to compete across three asset classes.

In July, CBOE announced that it would be launching a new securities trading marketplace, CBOE Stock Exchange LLC (CBSX). CBOE is partnering with Interactive Brokers Group LLC (IB), LaBranche & Co. Inc., Susquehanna International Group LLP and VDM Specialists. It is significant because, as CBOE Chairman and CEO Bill Brodsky pointed out to Thain during his visit, CBOE is NYSE’s biggest customer.

The CBSX will feature a hybrid market and will trade NYSE, Nasdaq Stock Market and American Stock Exchange listed securities. Its launch is planned in early 2007 pending final regulatory approval.

“We have the electronics that are as good as anybody’s and we have the ability of the broker to walk up and do a cross or a trade in a crowd,” Brodsky says, adding, “There is a tremendous amount of stock that gets done in and around our options business so there is a potential for synergy there.”

Aaron Hantman, CEO and president at Susquehanna says, “There’s a total transition and evolution in the marketplace and the market structure of all exchanges. This is a natural fit

for us.” Hantman points out that Susquehanna has always been involved in options market making at CBOE, which is a natural order flow provider to equity markets. “If we can capture that order flow, it’s a wonderful fit for us,” says Hantman. “Each exchange is going to have to value the liquidity providers that they have, and CBSX has figured out a way to work with a natural order flow through us and other outside venues.”

Steve Sanders, managing director, marketing and business development at Interactive Brokers, says, “Anything that pushes the industry forward is a good thing. We invest in exchanges not specifically for profit but because we’re pushing that electronic envelope. [CBSX] will help us offer a new venue for trading to our customers, and the more venues we can offer results in better price execution for our customers.”

CBSX will have designated primary and remote market makers. The makeup of ownership in the new venture has the CBOE at 46%, VDM at 18% and LaBranche, Susquehanna, IB and T.B.D. have 9% each.

“There is no lock on this but we have learned to compete very well,” Brodsky adds.

CBOE took further steps in the direction of demutualization and an eventual initial public offering by authorizing the filing of an S-4 registration statement with the SEC.

CBOE also announced that its board named Member Vice Chairman Ed Tilly, executive vice chairman, a newly created position.

By Yesenia Salcedo & Daniel P. Collins

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