CBOE won’t pursue dividend trading

Chicago Board Options Exchange (CBOE) Chairman and CEO Bill Brodsky said at a media lunch on Wednesday that he was not particularly concerned with a drop in CBOE market share in December attributable to dividend trading at a competing exchange and would not pursue volume growth through that practice.

The day before the CBOE's annual media lunch, the Chicago Sun Times reported that the NASDAQ OMX PHLX (the former Philadelphia Stock Exchange), had surpassed CBOE in market share for the month of December. It was perhaps poor timing for CBOE but the phenomena of dividend trading, which accounts for much of the surge in market share for PHLX over the last couple of years allowing it to overtake the International Securities Exchange in trading volume, has been well documented and does not produce fees for the exchanges they are executed on.

The Options Guide website describes dividend trades as an “arbitrage strategy whereby the options trader buys both the stock and the equivalent number of put options before ex-dividend and wait to collect the dividend before exercising his put.”

It can involve all options as well. The strategy is used by market makers usually on a quarterly bases when dividends are announced and produces huge volume for exchanges though it generates little revenue. PHLX’s fee structure has made it the place to exercise dividend trades.

The bottom line for Brodsky is that the trades do not add to CBOE’s bottom line. Brodsky said at the lunch that as a publicly traded company, CBOE is focused on creating shareholder value and while they have enjoyed their nearly uninterrupted run as the number one options exchange in terms of volume, he would not pursue a strategy that does not add to shareholder value. “We don’t actively pursue this because it does not have an economic interest. [It may] give them bragging rights but does not add to the value proposition for shareholders.”

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