CBOE Leans On Index Options As 1Q Profit Slides 7%

The Chicago Board Options Exchange is increasingly reliant upon its stable of contracts tied to stock indexes, a key area of its business that could be affected by a proposed cap on trading fees.

The largest U.S. options exchange by volume said that index options made up nearly a quarter of first-quarter activity, which was up 2% from a year earlier.

CBOE reported higher revenue but lower profit in what could be its final quarterly announcement before it details plans for an initial public offering in June.

Revenue rose 3% to $101.1 million in the three months to March 31, with net profit down 7% at $22.7 million, weighed in part by IPO-related expenses.

The exchange operator, which reported results late Tuesday via a notice to member-owners, is pursing the estimated $300 million float after resolving a long-running legal dispute in late 2009 over ownership rights in the company.

The planned conversion to a shareholder-owned entity comes after peers in the U.S. exchange sector had already gone public and consolidated in a flurry of mergers and acquisitions ahead of the financial crisis in 2008.

Its progress has been closely watched by analysts and investors seeking to gauge the value of the company, underpinned by a roster of exclusive licenses to trade options on such benchmark stock indexes as the S&P 500 and the Dow Jones Industrial Average.

CBOE reported a $3.5 million rise in transaction fees for the quarter thanks to higher trading volume and a rise in the average fee paid per contract, helped by customers' increased use of index-based products, which made up 24.4% of total contracts traded for the quarter.

Those options represent CBOE's biggest profit center and a commanding advantage over rivals, but they come with potential risks. Growth in nonexclusive options contracts tied to stock indexes has outpaced CBOE-specific products in recent years, and the rival International Securities Exchange has launched legal action to loosen CBOE's hold on the market.

Another potential headache is the 30 cents-per-contract limit on options trading fees proposed by U.S. securities regulators. This could cost CBOE between $14.2 million and $23.9 million in annual revenue, according to estimates from the exchange and the Securities and Exchange Commission.

The SEC, which proposed the rule in mid-April, aims to align the cost of buying or selling options more closely with the price quoted at an exchange.

The agency is seeking comment from the industry on the matter until June 21. CBOE, alongside other options exchange operators, plans to voice is opposition.

The price of memberships at the CBOE has come down following the SEC's rule proposal, with a seat on Wednesday selling for $2.35 million, down from a recent high of $2.95 million following the mid-March IPO filing.

CBOE said employee costs rose $2.9 million in the March quarter from a year ago, partly due to higher severance expenses tied to targeted staff reductions. Results also included a $1.5 million rise in legal expenses related to the planned shift to a shareholder-owned structure.

The rise in index options volume contributed to higher royalty fees, which climbed $2.9 million for the quarter.

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

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