CBOE parent to add electronic exchange

By Reuters
Posted Sep. 1, 2010 at 9:27 a.m.

The parent of the Chicago Board Options Exchange is hooking up some of the biggest Wall Street banks and trading firms to a long-planned electronic exchange, set to launch in late October.

Goldman Sachs Group Inc., Bank of America Merrill Lynch and Interactive Brokers Group Inc. are among the dozen firms forging connections to the new market, according to persons involved in the process.

C2, first announced in October 2008, represents CBOE’s answer to a crop of all-electronic stock options markets that have cut into its business over the last decade.

“As a complementary market to CBOE, we believe C2 will appeal to a wide variety of customers and have the potential to expand our customer base,” said William Brodsky, chief executive of CBOE Holdings Inc., in a statement.

CBOE shares settled 1.41 percent higher Tuesday at $20.91.

The CBOE remains the largest U.S. options exchange by volume with an estimated 27.2 percent market share in August, due to its exclusive rights to trade contracts linked to major stock indexes.

However, its share of trading in options on individual stocks and exchange-traded funds that are listed at all options exchanges has fallen below that of NYSE Euronext and Nasdaq OMX Group Inc., which both run multiple options markets.

The planned C2 platform aims to capture more business in heavily traded options contracts priced in penny increments, with a pricing model geared toward high-speed electronic traders.

CBOE earlier this month confirmed that C2 will incorporate a “maker taker” fee structure, which pays rebates to market makers for providing liquidity to the exchange, while charging trading fees to customers that remove liquidity.

The Chicago Board Options Exchange maintains a traditional, “pro rata” pricing model that charges market makers to interact with customer order flow.

Blends of the two fee schemes have gained traction among CBOE’s rivals this year. Nasdaq OMX drew more business to its PHLX options platform after introducing a form of maker-taker pricing in some options symbols, a move followed by the International Securities Exchange.

CBOE’s C2 will begin trading with 25 to 50 of the most actively traded options symbols in its first few weeks of operation, with many more contracts introduced through early 2011, according to a Tuesday statement from CBOE.

The market eventually aims to trade all options priced in one-cent increments, which are estimated to make up about 80 percent of daily trading in U.S. options. C2 also will list CBOE’s proprietary contracts linked to major stock indexes like the S&P 500, according to the company.

The new market will have its own board of directors, rule set and fee structure. It also maintains a separate exchange license, approved by U.S. regulators last December.

C2’s trading systems are situated in Secaucus, N.J., positioned to cut down on any potential slowdown involved in sending electronic options orders to Chicago from the East Coast.

Market makers on C2 will be charged $5,000 per month to stream quotes and submit orders to the market. A separate “electronic access permit” allows users to submit orders only for a $1,000 monthly fee.


Companies in this article

CBOE Holdings

CBOE Holdings Inc. claims it is the largest option exchange in the United States. The company, in addition to its core options trading business, provides marketplaces for trading futures contracts...

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