The Importance of Proprietary Products
The growing number of competitors in the options marketplace has left the exchanges struggling to find new sources of revenue as their old ones dry up. Whenever possible, they resort to the killer weapons of the options wars - proprietary products.
No exchange has been as successful at this 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 withstand the severe erosion of their equity options business. The importance of proprietary products has lead to a delicate balancing act amongst the competitors. Every exchange strives to develop and defend their own proprietary products while simultaneously trying to duplicate their opponentís most successful products. ìWe all genuflect to the god of competition, while in the back room we are all desperately trying to find proprietary products,î says Meyer Frucher, CEO of the PHLX.
Michael Bickford, Senior Vice President of the AMEX, also acknowledges that proprietary products are the Holy Grail of the options industry. ìWe 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 allows you to do many of the innovative things and pay for the technology is the ability to have proprietary products that can pay for things. Without that lifeblood of proprietary products, it becomes real difficult to do all of the other things that you want to do. Weíre all talking about faster, cheaper, 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 real hard to get all of that accomplished.î
The future of the options business has never been more uncertain. The exchanges are locked in brutal competition while they are struggling to come to terms with complex issues like demutualization, the dominance of proprietary products and the onset of the PIP/PIM. With so many open questions, even experienced industry vets admit that they are having a hard time reading the industryís tealeaves."
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