UPDATE: CBOE Is In Talks With Other States On Move -CEO

The parent of the Chicago Board Options Exchange has held talks with a number of governors and state officials about a possible move of its headquarters to another state after Illinois raised its tax rate, providing another challenge to the city's status as the self-styled "derivatives capital of the world."

January's tax increase is seen increasing CBOE Holdings Inc.'s (CBOE) state tax bill by a quarter. Chicago-based CME Group Inc. (CME), the world's largest futures exchange operator, is also talking about relocating its headquarters.

"We've had a series of meetings with people in this state and outside this state," said Bill Brodsky, chairman and chief executive of CBOE, in an interview. "The bottom line is that we don't want to leave Illinois, but the structure that exists as it relates to exchanges is virtually punitive."

Chicago's derivatives exchanges form the nucleus of a broader financial services sector that is also being hit by the tax rise, said Brodsky. The trading business is estimated to employ around 120,000 people in the city, and has expanded to fill the gap left by the decline of its manufacturing base.

Both exchange operators remain in talks with Illinois and city officials, with discussions about relocating some functions seen by observers as an effort to provide leverage in winning concessions.

"Our goal is to find a way that will remove the punitive aspects that will allow us not to move operations out," Brodsky said. "Hopefully we will come to a solution, but if not we have many other alternatives."

He declined to identify the states to which he is talking.

CME has held discussions with at least five states, with Florida and Texas seen as frontrunners to lure its headquarters and potentially several hundred staff, though its main trading floor and many other functions would still remain in Chicago.

CME Executive Chairman Terry Duffy indicated this week that a final decision was likely by early next year.

Brodsky said that Illinois' taxation framework sticks exchanges with a high effective tax rate that is "discriminatory and punitive" when compared with what is paid by public companies in other industries.

Much of the trade on CBOE's markets does not emanate from Illinois, Brodsky said, and the increasingly automated nature of financial markets has made the business more mobile. CBOE in recent years has staked out space in New Jersey to situate the company's smaller, electronic stock and options markets nearer to East Coast firms that trade via computer screens.

CBOE counted 581 staff at the end of 2010, and the "vast majority" work in Chicago, Brodsky said. That figure doesn't include the brokers and traders that populate its LaSalle Street trading floor, housed in a building that CBOE owns through a subsidiary.

Lawmakers in January elevated Illinois' corporate tax rate to 7% from 4.8% in an effort to fix the state's massive deficits. Had the higher rate been in effect last year, CBOE would have paid about $17.1 million in state taxes instead of $13.7 million.

A spokeswoman for Illinois Governor Pat Quinn didn't comment on CBOE, but said that Quinn supports reforming the state's tax structure.

"The governor's door is always open to business leaders to continue discussing other ways we can improve Illinois' business climate to create more jobs and expand the economy," she said.

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

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