Comment Letter
Much Ado About Nothing: CBOE, CME And The Battle Over The Exercise Right
Posted on 1/30/2008 in Industry by Mark S. Longo
A Thinly-Veiled Money Grab?I've resisted commenting on the exercise right battle for quite some time. However, now that the SEC has finally ruled on this issue and sent it back to the Delaware courts, I feel free to express my views on this controversial topic.
One of my primary reasons for not commenting on this issue is that I simply could not understand the fuss surrounding it. The entire issue seemed to be little more than a thinly-veiled money grab. The resolution of the dispute seemed obvious, yet the legal wrangling dragged on for years. It even became a key sticking point in the ICE/CME battle over the CBOT.
In many ways, this case reminds me of the dubious patent cases that are currently clogging up the court system. In far too many of these cases, companies have acquired patents for the sole purpose of wringing money from any firm with similar technology. While the CME did not acquire the CBOT solely for the exercise right, there are quite a few disturbing parallels in their conflict with the CBOE
As a former member of the CBOE, I freely admit that I might have a skewed perspective on this issue. So I decided to sit back and listen to all of the arguments before I came to any decision. That was several years ago. Now the jury is finally in and the fog of war is finally starting to lift...
The Power Of The Internet Boom
As I listened to both sides argue over the past few years, I quickly realized that my experiences on the CBOE trading floor gave me a degree of clarity on this issue.
I was present on the CBOE trading floor during the height of the internet boom. The stock market was soaring and the demand to trade options was at an all-time high. (Bear in mind that I'm speaking about the actual demand from professionals to make markets in options, not the speculative bids that have driven up CBOE seat prices in recent years.)
This demand was reflected in the long waiting periods (sometimes two or three months) that traders were willing to endure just to lease a seat. It was also reflected in the $12,000-$15,000 monthly lease prices that traders were willing to pay just to gain access to the trading floor. As those prices indicate, there was an incredible value attached to being on the floor during that period.
Why am I bringing this up? The answer is quite simple. With demand to trade options hitting its peak during the internet boom, we should have seen a flood of CBOT exercisers trading on the floor of the CBOE. After all, if this exercise right was truly as valuable as the CME now claims, then CBOT members certainly would have taken advantage of it.
However, that flood of exercisers never materialized, at least not to the degree that everyone expected. Instead, the majority of CBOT exercise right holders found that it was more profitable to remain on the CBOT trading floor.
It is ironic to think that seat lease prices, which are the measure of the actual demand to trade options, have plummeted since the internet boom. However, the estimated value of the exercise right, which by definition provided CBOT members with access to trade on the CBOE, has soared in the last few years. It is interesting how definitions can become obscured once rumors of an IPO enter the mix...
Continued In "Part Two: Blame It On The CME"
