One of Busby’s picks was the Chicago Board Options Exchange (CBOE), which at long last went public in June and has seen its stock dip recently. However, Busby said of CBOE: “you can make a lot of money if you stay with it.” Of another recommendation, Pepsi (PEP), Busby said it’s very stable and can make money into October, November and December. Busby also includedthe gold ETF (GLD) in his picks with the idea that gold is headed higher, and likes ProShares Ultra Short QQQ (QID) as a play against the Nasdaq.

Here are Tom Busby’s Top 10 Stocks for the Summer:

Apple (AAPL)
Ford (F)
CBOE (CBOE)
Exxon Mobil (XOM)
Utilities Select Sector SPDR (XLU)
ProShares Ultra Short QQQ (QID)
Ultra QQQ ProShares (QLD)
Pepsi (PEP)
Diamonds Trust Series 1 (DIA)
SPDR Gold Trust (GLD)

CBOE CEO Bill Brodsky and Executive Vice Chairman Ed Tilly discussed CBOE’s participation in CFTC-SEC harmonization efforts, specifically, an April 15 joint letter by CBOE and the Options Clearing Corporation about how the current dual regulatory structure is holding up new product approvals such as silver and palladium ETFs (CBOE’s gold ETF took three years to secure approval due to regulatory arbitrage).

Brodsky again brought up harmonization issues in the exchange leaders panel, saying there was an “unlevel playing field” in options where there was over-regulation, vs. the over-the-counter space, where there is none. He expects a regulatory reform bill to become law by June. ISE CEO Gary Katz said he was concerned with the mandate to move all products on a centrally-cleared facility, because some products actually could add more risk to the system. “You could damage a mechanism that already works,” he said.

Another hot topic on the exchange leader panel was where new volume and growth in the options industry would come from. Katz said volume had been stifled in part due to the financial crisis. “As people realize the market will turn around, volume will return,” he said.

And leaders agreed that volatility products like the VIX would contribute to new volume and growth. Brodsky called volatility “the new asset class.” Ed Boyle, executive vice president of NYSE Euronext, said “growth will come from volatility products, new products in general, and exchange-listed products.”

With any talk of its possible forthcoming IPO strictly verboten, regulation was one of the topics discussed at the Chicago Board Options Exchange (CBOE) annual media luncheon yesterday. CBOE Chairman Bill Brodsky noted that the markets were still working well and that any new regulations should be done in a “careful way.” He said CBOE is working closely with Congress and the SEC, but it was hard to say when many regulatory issues would be addressed, although he said that whatever gets done in Congress had to be done by the end of June. He also noted that Washington should stop demonizing high frequency trading. Although Washington is giving it a “dirty name,” Brodsky said high frequency trading actually has resulted in better, faster and tighter markets and leveled the playing field.

In his testimony, Donohue pointed out that “harmonization” of the two agencies hadn’t really been defined. “We believe that the ‘harmonization’ discussion between the CFTC and SEC must take account of the basic fact that these markets are highly dissimilar in many critical aspects and that the regulatory framework, by necessity, should be different,” he said, going on to express concern that “harmonization may be interpreted to mean abandoning the principles-based regulation of the Commodity Futures Modernization Act.”

A push towards adopting a more principles-based regulatory approach was echoed by other exchange leaders. CBOE Chairman Bill Brodsky in his testimony said “we support the Administration’s proposal that the SEC give serious consideration to shifting closer to a principles-based approach for exchanges and clearing organizations under its jurisdiction.” He mentioned that inconsistencies in regulation “have led to conflicts between the agencies over new products, clearing and portfolio margining.” Options Clearing Corporation Chairman Wayne Luthringshausen called for “combining the functions of the SEC and CFTC under a new principles-based statute to ensure holistic oversight of all derivatives products.” Another CFTC-SEC meeting tomorrow will include representatives from National Futures Association and Managed Funds Association.

The proposal received mostly a chorus of praise from the industry. CME Group called it “a significant step towards restoring confidence in the integrity of financial markets.” International Swaps and Derivatives Association CEO Robert Pickel said in a statement that it “provide[s] an important framework for financial regulatory reform.” In his statement, Futures Industry AssociationPresident John Damgard “commend[ed] the administration for the thoughtfulness and comprehensiveness of its plan.” In a statement, Chicago Board Options Exchange ChairmanBill Brodsky said, “We are particularly pleased that the plan recognizes the need for greater coordination and harmonization of the SEC and CFTC,  including streamlining the approval of new products and rule filings.” But not everyone is singing the proposal’s praises.

The “harmonization” of regulatory agencies is one of the elements that could impact the futures industry the most. Specifically, the plan calls for the CFTC and SECto make recommendations to Congress on how to eliminate differences “with respect to similar types of financial instruments that are not essential to achieving investor protection.” The two agencies must complete a report with recommendations by Sept. 30. If they don’t the matter will be forwarded to the soon-to-be created Financial Services Oversight Council. Some are concerned that the creation of additional agencies will not solve the regulatory problems that exist in the financial system. “In the proposal, there are not one, not two, but three proposed coordinating committees [including] the Financial Services Oversight Council. The better solution would have been to get rid of all of those agencies that require coordiation and consolidate them somehow,” says Gary DeWaal, general counsel of Newedge. “It’s more of the same. The Obama Administration has other priorities and they don’t want to use political capital to make real effective change in the financial services industry,” he adds.

House Agriculture Committee Chairman Collin Peterson isn’t a huge fan of the proposal either. In a statement, Peterson said he was “concerned about proposals to expand the authority and responsibility of the Federal Reserve, a secretive and unaccountable institution.”

Peterson did, however, applaud the proposal’s reforms for over the counter (OTC) derivatives regulation, including credit default swaps, the proposal’s other big takeaway impacting the futures industry. The proposal requires standardized OTC derivatives to be centrally cleared and executed on exchanges and requires transparency for all OTC trades and positions through recordkeeping and reporting requirements, as called for by Treasury Secretary Timothy Geithner in an earlier OTC reform proposal.

The Chicago Board Options Exchange (CBOE) issued a member advisory on the dangers of the proposal for options market makers. CBOE says the proposal has “unintended but harmful consequences,” including the passing on of options market makers’ cost of doing business to end users and wider spreads and increased transaction costs, which would result in a less liquid marketplace.   

This is no doubt a huge story for futures and options traders, and we’ll be capturing all of the reaction from our industry experts and sharing the latest developments on the blog and at futuresmag.com. What’s your reaction? How will this affect your trading? Join the discussion by leaving a comment below.

Brodsky also discussed another regulatory hot button issue, the SEC’s newest proposals to restrict short selling. Brodsky stressed the need for the SEC to allow an exemption for market makers. Not having an exemption would create a “draconian situation,” he said. He seemed optimistic that the SEC commissioners are open to industry comments and suggestions about the exemption. He called the short sale rule “the most important issue facing the options industry in the United States.”

In an address at the conference this morning, Elizabeth King, associate director of trading and markets at the SEC, was asked about the direction of the market maker exemption. “I don’t know what the likelihood is. I think it’s important that those of you here who are knowledgeable about the options business…comment on this proposal,” she said. There will be an SEC roundtable to discuss the rules on May 5, and the comment period will last through June.

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.

This morning in a CBOE members’ circular, CBOE’s office of the chairman issued a statement that while progress has been made, the agreement, which was to give former CBOT member an 18% equity stake in the options exchange and a cash payment of $300 million to end all claims, had not been finalized.

Word is that the agreement is still being held up by infighting amongst CBOT members over the number of people who will qualify for the settlement. The fewer who qualify, the larger the individual payouts would be. The CBOE has the right to walk away from any agreement that does not extinguish equity claims by all former CBOT members.

More to come….