At its annual press luncheon today, Chicago Board Options Exchange Chairman Bill Brodsky, Executive Vice Chairman Ed Tilly and Vice Chairman Brad Griffith reviewed the exchange’s triumphs in what has proven a very challenging year for all firms in the financial services industry, and the status of the ongoing scrum over exercise right privileges (ERP).
In regards to the longstanding ERP issue, in which former members of the Chicago Board of Trade have asserted their claim to an equity stake, Brodsky provided this: “There is light at the end of the tunnel,” adding that he had never said that before relating to the issue. The $300 million settlement with former CBOT members is currently before a chancellor in Delaware. Objections were heard on Dec. 16, mostly relating to eligibility issues related to the class action suit and not related to the fairness of the settlement. A ruling is expected in two to four weeks. Should the chancellor approve the deal, former CBOT members would have 30 days to file an appeal. While there is no telling how long an appeal could take, it likely would be less than a year. “An appeal would be the last hurdle,” Brodsky says, adding that the exchange has “no debt” and could pay the settlement with a check.
If the settlement finally is approved, it would clear the way for the demutualization of the exchange, leading to a possible initial public offering or for the exchange to acquire, or be acquired by, another exchange. Brodsky reminded those attending that the prior to their initial public offerings the CBOT and ISE were both approached to do deals, but wisely allowed the public to determine the value of the organization.
Brodsky was dismissive of the idea that the CBOE would be the object of a takeover and emphatic that the exchange would not jump at the first opportunity, adding that it could just as easily acquire another exchange. He then said that such talk was “absurdly premature.”
In 2008, total volume on CBOE was up 26%, with 1.193 billion options contracts exchanging hands. Equity options volume increased by 604 million contracts, an increase of 21%; index options increased 259.3 million, an increase of 13% and ETF options volume increased by 329.8 million contracts, an increase of 55%. It was the fifth straight record volume year for the exchange.
On the issue of market regulation and the naming of Mary Shapiro to lead the Securities and Exchange Commission and Gary Gensler to lead the Commodity Futures Trading Commission, Brodsky said that the choices were “more thoughtful than any I’ve seen from any other administration,” adding that both were experienced and not “political hacks.” Brodsky also said that the idea of a merger between the SEC and CFTC was “small potatoes” compared with what he expects to see happen with market regulation, given that there will soon be Congressional oversight on the regulators and the likelihood of OTC instruments soon being exchange traded.
Another bright spot has been the CBOE S&P BuyWrite Index, a strategy that allows investors to buy and hold stocks and write covered calls against them. The strategy trims the upside potential, but provides a cushion of protection for the investor. While not a an aggressive strategy for options speculators, it has opened the exchange to a pool of new customers, and for the exchange, secured an amount of repeat business as positions roll over from expiry to expiry.
Among other noteworthy products, This year, the CBOE Volatility Index closed above 50 on more than 50 trading days and had daily movements of more than 10% up or down on a record 45 days, compared with 42 days in 2007.
The VIX, commonly referred to as the Fear Gauge, acts as a barometer in anticipating the level of uncertainty in the market. Three month realized volatility for the index peaked on Dec. 11, 2008 at 72.5%; the previous high would have been Oct. 21, 1932, when the index would have hit 68.7% based on estimated historical prices.
CBOE has been licensing its VIX methodology to other exchanges, and with the KOSPI Korean equity index option making its debut for U.S. based traders, Brodsky explained that because KOSPI is a front month only option, it would be a poor fit for the VIX methodology, given its requirement for multiple expirations to create a skew.
