While it continues to work diligently to build an electronic trading system, the Chicago Board Options Exchange (CBOE) is taking a wait-and-see approach toward demutualization.
Speaking at the futures and options expo held last week in Chicago, CBOE Chairman Bill Brodsky said the CBOE will wait to see how demutualization shakes out at the Chicago Board of Trade (CBOT)-and other markets-before finalizing a for-profit conversion of its own. "We've decided as a policy matter to allow the demutualization activities of the Merc, the CBOT, the New York Stock Exchange and the NASD to play out, from a point of view of taxes and other issues ... while we attend to many of our own, more pressing points," he said.
The CBOT and CBOE, Brodsky explained, have a "unique" relationship that enables members of the CBOT to become members of the options exchange by just "filling out an application." Today, he noted, roughly 700 of the 1,402 members of the CBOT are also members of the Chicago options market. Therefore, he said, it makes sense to see what happens at the CBOT before the CBOE weighs in on demutalization.
In the mean time, one "pressing" project the CBOE will attend to is the creation and implementation of an electronic trading system. Via its Retail Automated Execution System (RAES), said Brodsky, the CBOE now executes roughly 30% if its orders "without any human intervention." Moreover, 90% of the CBOE's orders are routed to the exchange electronically and CBOE members collectively use 1,200 handheld PCs for floor trading.
Still, despite the fact that the exchange has automated much of its trading process, Brodsky said that there are at least three reasons why the CBOE is likely going to list some of its contracts on a screen-based trading system. One is the rapid evolution of extended-hours trading in the equity markets. More and more traders, he said, are looking to trade options on stocks electronically after the NYSE closes-especially traders on the West coast.
An electronic trading system, Brodsky said, could also give the exchange a place to list its "less active options" on a full-time basis. And lastly, he said, implementing an electronic trading platform would allow the CBOE to "hedge its bets," just in case there is an incredible demand for the exchange to move to a full-time, screen-based environment.
All that said, Brodsky remains confident that there will continue to be a place for technologically-savvy floor-based exchanges.