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Patrick L Young Newsletter The Frontier Financier - Prologue

 

Prologue

 

006

The Value of CBOE

 

Dear <<First Name>>,

The Chicago Board Options Exchange is on the cusp of an IPO while risk and opportunity remain pervasive. US equity options markets have always been competitive although to the chagrin of the incumbents, none of them spotted the electronic trading niche brilliantly exploited by ISE. There are also other threats: True, an ISE legal challenge to the CBOE's exclusive trading of various indices is probably unlikely to succeed. However, the outcome of an infringement lawsuit concerning an ISE patent on proportional allocation of trades is less clear cut. The ISE may not benefit from a willful infringement order claim of up to 900 million dollars but even a fraction of the base 300 million US dollar claim provides cause for CBOE shareholder concern.

The CBOE float was long delayed by the CBOT ownership rights dispute. This has led to an interesting anomaly in the pricing of CBOE seats. Where quoted exchanges once rose to lofty peaks, the FTSE Mondovisione Exchanges Index is now less than half its all-time highs. The CBOE seat price has retraced much less from its 2008 all time high of 3.3 million dollars. As the ISE patent infringement suit has become pubic knowledge, CBOE seat prices dipped to post bubble lows of 2.2 million on 1st and 3rd June. Prior to this, the Caldwell's loudly trumpeted their purchase at 2,350,000 May 20th (they hold more than 50 seats). In recent days a trio of seats sold at 2,474,900 on June 4th but these seem to have been transactions between related parties. June 6 and 7 saw trades at 2,250,000 and 2,400,000 respectively.

Scanning the recent market share numbers, it seems seat holders are understandably transacting via CBOE. However, I am not entirely convinced that such volume will entirely remain once CBOE equity can be freely traded. At least in the short term, this could undermine the CBOE assertion that their new C2 options exchange will be a big factor in volume growth. Rather CBOE may struggle to maintain market share at the end of the lock-in period. Likewise profit margins: CBOE is under pressure to reduce costs by the SEC, who are seeking a 30 cent options transaction fee cap. Here one can feel a certain sympathy with CBOE as the perils of member ownership have meant that despite stringent efforts at creating electronic capacity, their market is still hampered with the entirely outmoded open outcry floor which is expensively inefficient compared with a computerized marketplace. This is clearly apparent in CBOE's headcount which at nearly 600 is approaching three times that of the lean ISE!

On a stand alone business case, CBOE represents a very significant business with strong operational management. However, it is tough to value the CBOE at a multiple remotely equivalent to CME Group for one simple reason: CBOE has no clearing house. True, CBOE will soon be the only single American girl at the prom. However, the frenetic deal making surge of 2006-2008 was very different to the world into which CBOE now goes public. Potential suitors may prove thin on the ground for quite some time. Who wants to be brave making an acquisition at high (dilutive) multiples when a core regulatory risk is stalking all markets?

As I podcast over a year ago, there may be considerable value in acquiring a company run by Bill Brodsky who is certainly the best connected exchange official with the current White House. With a successful IPO completed and stock options exercised then once his ground-breaking term as Chairman of the World Federation of Exchanges ends early next year, Brodsky will presumably progress to a new career in Washington D.C.

The CBOE IPO will doubtless succeed. The actual IPO amount is fairly modest. The company is a good one with experienced management and much potential. However, it is really difficult to justify the notion that CBOE is going to explode in public trading simply because it is a major exchange. In recent days there has been clear evidence that many regard exchange IPOs as simple 'slam dunk' affairs. The CBOE floatation looks more like a case of "stags beware."

As usual, I am available for CBOE and other calls via the usual channels throughout European and US working hours.

With best wishes,

Patrick

Patrick L Young
patrick@derivativesvision.com


 


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It’s summer so I am at home in Monaco but thanks to a lack of political leadership in Europe, there have been ample opportunities to speak with the media. For my most recent videos from RT News channel, have a look on my newly revamped web site: www.patricklyoung.net.
 
Various projects are in the works currently with more news to come!

In the Media



Current Projects

I'm hard at work on the final edits of a book for charity with contributions from a welter of serious hedge fund maangers, analysts and pundits...more news to follow soon!

Several new start-up exchange ventures are on my desk while various publsihing ventures are also nearing fruition!


Travel Plans

Various destinations in Europe likely during September including London.

About This Newsletter

Patrick L Young is the author of several financial market books such as "Capital Market Revolution!" and

"The Exchange Manifesto" His Op Eds have been published in most of the world's leading financial media such as the Financial Times and Wall Street Journal while he has appeared frequently on BBC,CNBC, CNN and other digital media throughout the world.

My expertise is, (in no particular order!) exchanges, derivatives, market infrastructure and financial centres, as well as emerging markets. I can claim modest provenance as an early adopter on the web, having published various online magazines along with other WWW ventures since 1995. Nowadays I enjoy a varied portfolio of advisory work (most notably for investors in exchanges) but along the way I have done just about everything from multiple financial start-ups through to advising government and other stakeholders in financial centres the world over. I also indulge in some  entrepreneurial projects too. After more than 20 years in finance some folk might think I am due a spot of remission for good behaviour. I think it is clear from this bulletin, my passion for markets remains as keen as ever!

 

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