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The Race For The Next Great Options Monopoly

Fighting For Survival
The growing number of competitors in the options marketplace has left the options exchanges struggling to define themselves. With the NASDAQ options market looming on the horizon, the competitive pressure has become even more intense.

Although the overall options pie is growing, it has also become more difficult (and more expensive) to carve out and defend a piece of that pie. With old sources of revenue drying up, exchanges are increasingly resorting to the killer weapons of the options war - proprietary (aka monopoly) products.

Follow The Leader
No exchange has been as successful at this tactic as the CBOE. With their exclusive licenses on S&P index options, along with new proprietary products like VIX futures & options, the CBOE has been able to weather the severe erosion of their equity options business. Although their reliance on monopoly products is highly controversial, this tactic has stemmed their hemorrhaging market share and allowed them to remain on top of the options charts.

The importance of proprietary products has lead to a delicate balancing act among the options competitors. Every exchange strives to develop and defend their own proprietary products while simultaneously trying to duplicate their opponent’s most successful products.

• “We all genuflect to the god of competition, while in the back room we are all desperately trying to find proprietary products,” says Meyer Frucher, CEO of the PHLX.

Monopolies Drive The Engine
Michael Bickford, AMEX's Senior Vice President of Options, also acknowledges that proprietary products are the Holy Grail of the options industry:

• “We all talk about competition and how great it is, and Bill (Brodsky, Chairman & CEO of the CBOE) knows better than the rest of us, what frequently drives the engine of the exchange and also allows you to do many of the innovative things and pay for the technology is the ability to have proprietary products. Without that lifeblood of proprietary products, it becomes very difficult to do all of the other things that you want to do as an exchange. We’re all talking about making the options business faster, cheaper and better. But, unfortunately, faster costs a lot of money and cheaper brings in less revenue. Unless there is something out there driving the engine, it becomes very difficult to get all of that accomplished.”

Reading The Tea Leaves
Although the growth rate of the options business is nearly exponential, there are still a number of potential speed bumps that have to be overcome. The exchanges are locked in brutal competition while they struggle to come to terms with complex issues like international consolidation, dual regulation, the Penny Pilot and the contentious maker-taker pricing model.

With so many open questions on the table, even experienced options vets are having a hard time reading the industry’s tea leaves. If there is one thing that remains certain, though, it's that monopoly products are still the ultimate trump card of the options game. No matter how many players invade this space, or how many regulatory hurdles are thrown in their way, exchanges will continue to rely on monopoly products to defend, and hopefully grow, their piece of the pie.