Comment Letter
NYSE & CBOE Laying Down Their Swords?
Posted on 3/9/2007 in Industry by Mark S. Longo
An interesting rumor has been making the rounds in the options industry lately. It concerns one of the biggest names in the options world and one of the biggest names in the equities world finally ending their struggle. Yes, that’s right, I’m talking about the rumors of a potential alliance between the NYSE & CBOE. MERGERS & SPINOFFS
For much of the last decade, the NYSE & CBOE operated in two separate realms. However, two recent changes by both exchanges have thrust them into direct competition.
The first change came in 2005 when the NYSE decided to re-enter the options fray after an eight-year hiatus. The result was a merger with ArcaEx to become NYSE Group. One of the components of ArcaEx was an options exchange called the Pacific Exchange (a.k.a. P-Coast). This options exchange is now known as NYSE Arca Options, and it is currently the number four options exchange in the country.
The CBOE also upped the ante this week with the launch of their stock exchange (CBSX). With their entry into the equities world, these two goliaths are suddenly in direct competition on two different fronts.
STIRRING THE POT
The idea of some sort of deal/merger/alliance between these two rivals is hardly new. However, the rumor mill went into overdrive last week when the President & Co-COO of NYSE Group delivered a speech in Chicago. As it turned out, the CEO of the CBOE was in the audience for his speech. When the two men were later cornered by a Chicago Sun-Times reporter, they both gave cryptic denial/non-denials that talks had taken place between the two exchanges. This has since spurred a flurry of speculation that the CBOE will be the next to join the long list of exchanges that are entering into alliances with the NYSE.
A LONG HISTORY
If talks are indeed taking place between the NYSE & CBOE, it would not be the first time that these two former rivals arrived at a mutually beneficial agreement. Longtime veterans of the options wars know that the ArcaEx acquisition isn’t the NYSE’s first dalliance with options. In fact, until about ten years ago, NYSE was among the CBOE’s only competitors in the options game.
However, after a number of ups and downs in the options business, NYSE decided to wash their hands of the fickle options marketplace. So they packed up their entire operation, sold it to the CBOE and walked away. Their options products, and most of their options traders, were left to find a new home on the CBOE’s “Green Room” trading floor.
SWORDS INTO PLOWSHARES
It’s not hard to see the upside for both exchanges if such a deal/merger/alliance were to take place. After all, although options volume continues to explode, the options markets are growing more competitive every year. Exchanges are constantly forced to make new acquisitions and find new strategic partners just to survive in this cutthroat environment.
The tepid success of NYSE Arca Options is a perfect example of how difficult it is to gain market share in today’s options markets. On the one hand, it is impressive that the perennially bottom-dwelling P-Coast has managed to rise to the number four spot in the industry. On the other hand, most observers had far loftier expectations for an exchange backed by the formidable muscle of NYSE Group. An alliance with the CBOE might give them the volume they need to boost their market share beyond its currently anemic 12%.
At the same time, an alliance could also be a significant boost for the CBOE. Once the undisputed market leader, the CBOE has now seen its market share eroded by the onset of numerous competitors. It is currently locked in a ferocious struggle with the ISE for the top spot in the industry. The CBOE's only current lifeline is the SPX, the future of which hangs on the outcome of a legal dispute with the ISE.
Given all of these challenges, including the looming specter of foreign competition and the pending addition of NASDAQ to the options markets, most observers think it is only a matter of time until the CBOE is forced to find a strategic partner.
Until recently, one of the favorite candidates was cross-town juggernaut CME. Given CME’s pending acquisition of CBOT, many think it will be difficult for the CBOE to escape their gravity well. With the CME’s dominance of the futures markets all-but assured, their dearth of options offerings is the only chink in their armor. That is a niche the CBOE would fit nicely, even though such a merger would undoubtedly be a regulatory nightmare.
WHAT DOES THE FUTURE HOLD?
Although rumors are swirling that an alliance between NYSE & CBOE could be announced at the upcoming Futures Industry Association Expo, I’m not holding my breath. If talks are indeed taking place, I don’t expect to hear the results for some time. There are far too many variables to consider before any deal is closed.
For example, what would be the nature of their relationship? Does NYSE really want to be tied to another floor-based exchange when they can’t decide what to do with their own trading floor? What about the SPX? Would an alliance between the two exchanges give the NYSE access to the CBOE’s crown jewel?
Until these questions and many more can be answered, color me skeptical…
Note: Stay tuned to The Options Insider.com for all of the latest developments from the upcoming Futures Industry Association Expo.
