CBOE, S&P Dow Jones Extend Exclusive License for Options

CBOE Holdings Inc. and S&P Dow Jones Indices extended the options exchange’s exclusive license to trade contracts based on the Standard & Poor’s 500 Index, Dow Jones Industrial Average and other broad gauges until 2032.

Index contracts including the S&P 500, the most-active in the U.S., generated more transaction fees than any other product at CBOE in the fourth quarter. Exclusive rights to the S&P 500 and S&P 100 previously expired in 2018 and those for the Dow average were scheduled to end in 2017, according to CBOE. Financial terms of the deal weren’t disclosed.

Exchanges are seeking to boost revenue amid declining volume and increasing competition. International Securities Exchange Holdings Inc. said earlier this month that it plans to start a second options market that will become the 12th U.S. exchange for equity derivatives. Most options contracts are traded on multiple exchanges, which boosts competition for the quoted price of bids and offers.

“It’s definitely a positive for CBOE,” Jillian Miller, an Atlanta-based exchange analyst at BMO Capital Markets, said in a telephone interview. “When you look at options specifically, the options based on indexes and other proprietaries have been growing a lot more than, say, the options on Google. The areas of the business that are growing are the more innovative ones.”

Transaction Fees

Index contracts accounted for 64 percent of CBOE’s total options transaction fees last year, compared with 55 percent in 2011, according to regulatory filings. Transaction fees for options on equities slid to $13.5 million in the fourth quarter of last year, 25 percent less than in the same period in 2011.

CBOE’s average transaction fee per contract for index options increased 9.1 percent to 67.2 cents last year. The fee for equity derivatives on stocks and exchange-traded funds declined 26 percent to 12.1 cents, the filing said.

Contracts on benchmark gauges were 27 percent of CBOE’s options volume last year, about the same as 2011, according to the company’s annual statement.

Exclusive trading agreements may help boost CBOE’s stock price, Niamh Alexander, a New York-based analyst at KBW Inc., said in a research note today. The shares rose 0.3 percent to $35.86 in New York today, extending its advance for the year to 22 percent. The Bloomberg World Exchanges Index, which includes CBOE and 24 of its peers, has gained 12 percent this year.

Exclusive Agreement

“We initiated conversations with S&P primarily driven by the fact that the analyst community was pressing us constantly about the duration of the contract,” Bill Brodsky, chairman and chief executive officer of CBOE Holdings, told reporters at a briefing today at the annual Futures Industry Association conference in Boca Raton, Florida.

The deal extends a decades-long relationship between CBOE, home of the biggest U.S. options market, and the index provider, Brodsky said. CBOE will have non-exclusive rights to use the benchmark gauges as the basis of contracts until 2033, according to the company’s statement.

“CBOE helped put us in the business of the index world,” Alex Matturri, CEO at S&P Dow Jones Indices, said at the briefing.

CBOE became the first of 11 exchanges now trading U.S. options when it started in April 1973. Arrangements that limit which markets can trade certain contracts benefits exchanges and investors by enabling liquidity to concentrate in fewer venues, Matturri said.

Declining Volume

“We’ve seen the benefits of being partnered with one exchange,” Matturri said. “I think if we hadn’t done an exclusive arrangement 30 years ago CBOE wouldn’t have had the incentive to invest and develop the marketplace and educate the marketplace. So there are certain benefits that come from exclusives or even semi-exclusive relationships.”

Options trading slowed to a daily average of 15.9 million contracts last year from a ninth-consecutive record of 18.1 million in 2011, according to data from Chicago-based Options Clearing Corp. Daily average stock volume slipped to 6.42 billion shares in 2012 from 9.77 billion in 2009, data compiled by Bloomberg show.

CBOE and NYSE Euronext said last week that they will share the right to list options on equity indexes owned by Seattle-based Russell Investments, whose gauges serve as benchmarks for $3.9 trillion in investments.

The agreement comprises six indexes that have listed options including the Russell 2000 gauge, whose contracts have been traded on multiple U.S. exchanges, the companies said on March 8. The semi-exclusive arrangement will begin in late April, the companies said.

Rights to trade Russell stock-index futures are held exclusively by Intercontinental Exchange Inc., the energy and commodity futures bourse that agreed to buy NYSE Euronext for $8.2 billion. Russell Investments said in January that distribution of real-time data for its indexes will switch to NYSE Euronext from Nasdaq OMX Group Inc. as the two firms plan to create options on the gauges.

Before it's here, it's on the Bloomberg Terminal.