UPDATE: SEC Approves Chicago Board Options Exchange's C2

The Securities and Exchange Commission has approved a new electronic market developed by the Chicago Board Options Exchange, officials confirmed Monday.

The new exchange, known as C2, is expected to launch in the second half of 2010 as the CBOE awaits possible new rules for U.S. options markets and works with trading firms to implement changes to options symbols and pricing.

C2 is intended as an all-electronic complement to CBOE's existing hybrid model incorporating floor and electronic trading, and gives the CBOE a place to test-drive new market functions, according to CBOE Vice Chairman Ed Tilly.

"It will let us look at different pricing schemes, and provides the flexibility to change matching algorithms very quickly," Tilly said in an interview.

Situating C2's electronic trading operations in the Secaucus, N.J., data center run by Equinix Inc. (EQIX) will also serve to eliminate any potential slowdown involved in sending electronic options orders from the East Coast to the CBOE's Chicago-based headquarters, according to Tilly.

The CBOE is the largest U.S. options exchange by volume, claiming an overall market share of about 32% in November.

Having an electronic options platform close to high-frequency trading shops based in New York and New Jersey will help CBOE compete against rival exchanges run by NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) set up to incentivize such liquidity providers.

Kansas City, Mo.-based BATS Global Markets is also targeting the market with its own electronic options exchange, slated to launch sometime in mid-February.

C2 was slated to go live earlier this year but was put on hold as regulators expanded the number of options traded in one-cent increments as opposed to nickels and dimes, a 12-month effort that will see an estimated 85% of the market trade in pennies by next fall.

Options exchanges are also working with customers to implement a new system used to identify options contracts, similar to ticker symbols for stocks, which is expected to roll out Feb. 12.

"Symbology will really tax each of our trading firms' technology departments, so we want to make sure they're totally ready," Tilly said, adding it was unlikely C2 would launch before June for this reason.

While the industry implements these changes, the Securities and Exchange Commission is scrutinizing the way exchanges decide how to route customer orders to other venues, while taking steps to speed up the approval of new options products.

These issues also weigh on C2's launch date, according to Tilly.

Meanwhile, the CBOE is weighing its own future, as the settlement of a long-running legal battle earlier this month opened the way for the largest U.S. options exchange by volume to convert to a shareholder-owned structure from its current ownership by members.

Such a conversion, known as demutualization, would allow the CBOE to pursue a long-delayed initial public offering, seen happening by mid-2010.

Demutualization could also see bidders such as derivatives exchange operators CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE) seek to acquire the CBOE.

C2's launch would be unaffected by the demutualization proceedings, Tilly said, because it is wholly owned by CBOE Holdings rather than the CBOE's current membership.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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