CME weighs takeover of CBOE

The contest for the Chicago Board Options Exchange may last into the second half of 2010 as the biggest market for U.S. equity derivatives resolves a lawsuit over who owns it.

CME Group Inc., the world's largest futures market, is "putting out feelers" to buy CBOE for about $5 billion, Crain's Chicago said yesterday, citing people familiar with the matter it didn't name. The CBOE has said it won't be able to change into a stock-based company until a lawsuit over how its membership interests are divided is settled. The deadline for appeals in the case by CME's Chicago Board of Trade is Oct. 21.

"I'm skeptical," said Richard Repetto, an analyst with Sandler O'Neill & Partners LP in New York. "Would they be talking? Absolutely. But they have got to understand and work through a lot of issues."

Options trading is heading for a record year and has more than quadrupled since 2002 as investors seek to hedge equity holdings and amplify returns, according to data compiled by Options Clearing Corp. CME cemented its hold on futures in the past three years with the purchase of CBOT and the New York Mercantile Exchange.

Shares of CME climbed 1.3 percent to $317 as of 8:46 a.m. in New York during trading before the open of U.S. exchanges.

Faster Growth

"The trend over the last few years is that derivatives are growing stronger than the underlying cash market," said Simon Bonouvrie, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. "As a result, exchanges see the avenue of growth being in derivatives trading, including options."

Allan Schoenberg, a spokesman for Chicago-based CME, said the company doesn't discuss speculation. Carol Kennedy, a spokeswoman for CBOE, declined to comment. There is no formal bid, and negotiations are on hold until after the deadline for filing appeals in the lawsuit, Crain's said.

A bid may value each CBOE seat at about $4 million, a 50 percent premium that would total as much as $5 billion for the whole exchange, according to Crain's.

CBOE Chairman Bill Brodsky said last month that the Chicago-based company won't finish the process of demutualizing, or exchanging stock for the ownership interests of its members, until next year after settling the CBOT lawsuit.

Nine Months

"The resolution of the appeals is estimated to take approximately nine months from the filing of the appeals," he said in a Sept. 1 report. The company previously said demutualization is a step toward a possible takeover.

A group of former CBOT members sued CBOE in 2006, claiming they're entitled to swap CBOE trading rights that date to 1973 into shares of the options exchange. The CBOE claimed CBOT's sale in 2007 eliminated the ownership claims.

The CBOE agreed on membership eligibility on Aug. 20 with the CBOT that prevents further legal claims after the market becomes a public company.

Once shareholders and the Delaware Chancery Court approve the agreement, no one else will be eligible for membership and lawsuits will be dropped, CME said in a statement. Former members of the CBOT are to receive $300 million in cash and an 18 percent stake under terms announced June 2.

U.S. options trading rose 25 percent to a record 3.58 billion contracts last year, according to OCC data. Volume of 2.88 billion contracts this year, or 14.5 million a day, puts 2009 on pace for another record, the data show.

CBOE handled 31.4 percent of the equity and index option orders on all seven U.S. exchanges last month, followed by International Securities Exchange with 24.9 percent, according to data from Chicago-based OCC. ISE in New York is owned by Frankfurt-based Eurex AG, Europe's largest futures exchange.

Largest Derivative Market

Excluding options linked to indexes, ISE was the largest U.S. equity derivatives market in September, with 29.1 percent of the business in contracts tied to stocks and exchange-traded funds. CBOE, which had 28.7 percent, gets a boost in the total options market because of exclusive listings for contracts tied to the Standard & Poor's 500 Index and the VIX, as the CBOE Volatility Index is known.

S&P 500 options are the fourth most-traded in the U.S., accounting for 4.2 percent of transactions during the first nine months of this year, according to OCC data.

CBOE's earnings are growing faster than the CME's, data compiled by Bloomberg show.

Net income at CBOE rose 39 percent to $115.3 million last year as its operating profit margin increased to 45.6 percent from 39.7 percent in 2007.

CME's net rose 8.7 percent in 2008, down from between 25 percent and 80 percent during the previous six years, Bloomberg data show. Analysts estimate a 22 percent increase to $867 million this year, according to the average forecast in a Bloomberg survey. Its shares have gained 50 percent in 2009.

Exchange trading of options began in the U.S. at the CBOE on April 26, 1973, when 911 calls were listed on 16 stocks, according to the exchange's Web site. There were 1.1 million contracts traded that year. Put trading was introduced in 1977. Annual options volume first exceeded 100 million contracts in 1981 and surpassed 1 billion in 2004.