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CBOE Stock Exchange Deal Gives CBSX New Revenue, Flexibility

Jan. 6 (Bloomberg) -- A market partly owned by CBOE Holdings Inc., which runs the largest U.S. options exchange, acquired the 127-year-old National Stock Exchange to get access to new types of customers.

CBOE Stock Exchange, owned by Chicago-based CBOE Holdings and nine companies including Interactive Brokers Group Inc. and Susquehanna International Group LLP, completed its purchase of NSX on Dec. 30, according to David Harris, president and chief executive officer of CBSX. Terms of the deal weren’t disclosed. Harris is now also chairman and CEO of Jersey City, New Jersey-based NSX, founded in 1885 as the Cincinnati Stock Exchange.

Owning the venue gives CBSX more flexibility to experiment with fees and rules to appeal to different types of investors and a new business serving electronic communications networks, which are required to display their quotes publicly. The service NSX provides, called order delivery, reduces the chance that bids and offers from market makers will get executed on both the ECN and the exchange where they’re displayed.

“It’s another revenue stream,” said Sang Lee, managing partner at Boston-based Aite Group LLC. “Especially for a small player, that piece of the business can be important.”

NSX and CBSX each account for less than 1 percent of U.S. equities volume, Harris said in a phone interview.

ECNs over the past dozen years forced exchanges to compete more vigorously for orders by making their systems faster, allowing investors to trade electronically and improving prices, Lee said. Bats Global Markets Inc. of Lenexa, Kansas, and Jersey City, New Jersey-based Direct Edge Holdings LLC became the largest ECNs after rules implemented in 2007 boosted competition for shares listed on the New York Stock Exchange. They later converted their platforms into exchanges.

More Competition

“ECNs gave us increased market competition that changed the behavior of entrenched incumbent exchanges to the point where the market looks completely different,” Lee said in a phone interview. While these venues no longer serve the same role and have led to the fragmentation of trading among more venues, they’re markets that can still innovate and offer new services, he said.

Trading in the U.S. is spread over 13 exchanges, several ECNs and more than 40 dark pools, or private venues that don’t display bids and offers. Broker-dealers can also internalize orders from securities firms serving retail investors by trading against them within their walls, or finding counterparties for institutional customers to trade with away from exchanges.

Bloomberg Tradebook, owned by Bloomberg News parent Bloomberg LP, runs an ECN.

Citigroup, Credit Suisse

The National Stock Exchange will continue to provide order delivery for market makers and firms using LavaFlow ECN, owned by Citigroup Inc., and Zurich-based Credit Suisse Group AG’s Light Pool, Harris said. LavaFlow accounts for about 1 percent of U.S. equities volume, according to John Procopion, president of the market and head of transactions and execution services at New York-based Citigroup.

“They have a very nice business providing order delivery for ECNs,” Harris said about NSX. “It’s a business that serves an important role in the national market system in that it allows broker-dealers to operate lit pools,” or markets that display prices and compete with exchanges. “ECNs offer a competitive accelerator to change in the markets,” he said.

CBSX’s purchase of NSX leaves only one out of 13 equities exchanges run as a single market. NYSE Euronext, which operates the New York Stock Exchange, and Nasdaq OMX Group Inc. each own three venues. Bats, Direct Edge and now CBSX have two each.

Founded in 1882

The Chicago Stock Exchange, founded in 1882, is the last independent venue. It’s open to a deal, according to Chief Executive Officer David Herron. Bank of America Corp., Goldman Sachs Group Inc., JPMorgan Chase & Co. and E*Trade Financial Corp. own almost 37 percent of the company, which was “marginally profitable” in 2010, he said.

“We’re not currently actively exploring anything, but we’re open to the possibility” of a sale, Herron said in a phone interview. “Many other exchanges have been absorbed or partnered with others, and it makes sense to leverage infrastructure to support more than one product line.”

The consolidation of U.S. exchanges under common ownership resulted from the transition to electronic markets starting in the 1990s. Over the last decade, NYSE and Nasdaq bought ECN markets that flourished after new Securities and Exchange Commission rules created opportunities for automated venues to challenge them.

Same Technology

NYSE and Nasdaq eventually acquired and maintained separate exchanges on the same technology infrastructure so they could employ different trading rules and fees to appeal to different types of customers with minimal additional costs.

NSX, then called the Cincinnati exchange, became in 1980 the first exchange globally to shift to electronic trading from transactions handled by humans. By 2007, 84 more stock exchanges were fully electronic, according to data compiled by the World Federation of Exchanges.

The National and Chicago exchanges, CBSX and NYSE Amex are typically the smallest U.S. equity exchanges, Herron said. NYSE Euronext bought the American Stock Exchange for $260 million in 2008. Amex was earlier known as the “curb market” because it developed in the streets outside NYSE in lower Manhattan. The five regional markets over the last two decades were the Chicago, National, Boston, Philadelphia and Pacific exchanges.

Regional venues developed in most large U.S. cities in the 19th and 20th centuries to let investors buy and sell shares of local companies and trade stocks listed on NYSE. As insurance companies and other institutions increased their trading in the 1960s, some regional exchanges also provided cheaper alternatives to trading on NYSE, according to research from the Federal Reserve Bank of Philadelphia.

Denver, Spokane

Exchanges that merged with those in nearby cities or shut down over the last century include markets in Baltimore; Buffalo, New York; Cleveland; Denver; Detroit; Los Angeles; New Orleans; Salt Lake City; St. Louis; Spokane, Washington; and the nation’s capital, according to annual SEC reports. Exchanges exempt from SEC registration existed in Colorado Springs, Colorado; Honolulu; Seattle and Wheeling, West Virginia.

From the late 1990s until the mid-2000s, more than a dozen ECNs emerged to draw Nasdaq and then Amex and NYSE trading. As the primary markets that list and trade stocks converted from membership-based organizations to for-profit companies, ECNs and regional exchanges sold stakes to more than 100 brokers and firms, many of which owned portions of other systems. Ownership gave brokers a hedge against price hikes and decisions by what was called the NYSE and Nasdaq duopoly.


Nasdaq bought electronic rivals BRUT LLC in 2004 and INET ECN in 2005. The Boston and Philadelphia exchanges are now owned by the company that became Nasdaq OMX. Archipelago Holdings Inc., which ran an alternative electronic market in Chicago, bought the Pacific Exchange in 2005, before being acquired by NYSE in 2006. It’s now called NYSE Arca.

Competition after 2007 took place mainly through Bats and Direct Edge instead of regional markets because broker-run venues are regulated more lightly than exchanges and have more flexible rules, Herron said. Brokers wanted platforms to cater to their needs ahead of those of shareholders and systems that were nimble and fast, he said.

“It was possible for large proprietary trading firms to own virtually all of Bats in the beginning, instead of sharing ownership with others at regional exchanges,” he said.

CBSX, which receives technology and operational support from the parent of the Chicago Board Options Exchange, acquired about 45 people from NSX, who will join the four from the smaller exchange, Harris said. Both will be based in Jersey City, where orders for the markets will also be matched. While CBSX was profitable in 2010, it wasn’t last year because of the acquisition, Harris said. NSX was unprofitable, he said.

Fees, Rules

Running two markets will allow CBSX to operate venues with different fees, rules and services, Harris said. It also gives CBSX control over an exchange license. CBSX uses the CBOE license to trade stocks. NSX owns its own computer system to match orders and has a brokerage that can route unmatched trade requests to other venues, he added.

“We’ve long wanted to have multiple books,” Harris said, referring to an exchange’s electronic list of buy and sell orders. “Regional exchanges that are single books have a more difficult business.”

To contact the reporter on this story: Nina Mehta in New York at

To contact the editor responsible for this story: Nick Baker at

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