SEC Investigating Chicago Board Options Exchange On Compliance

U.S. regulators are investigating the parent of the Chicago Board Options Exchange, examining the company's oversight of its markets and traders.

CBOE Holdings Inc. (CBOE) officials are cooperating with the investigation and have initiated a separate internal review of compliance with U.S. securities laws, the Chicago firm disclosed in a regulatory filing.

Representatives of CBOE and the Securities & Exchange Commission declined to comment on whether the investigation was related to a specific issue or if it represented a more routine review of compliance functions. CBOE hasn't been accused of any wrongdoing.

The investigation comes as U.S. market regulators more closely scrutinize exchanges and market participants, following market-wide events such as the May 2010 "flash crash" and the collapse of broker-dealer MF Global Holdings Ltd. (MFGLQ), alongside trading matters tied to specific venues.

The Chicago Board Options Exchange is the biggest of the nine U.S. options markets, with 27.7% of the overall market in February, according to figures from industry clearinghouse OCC. Its parent, CBOE Holdings, also runs the all-electronic C2 options market and a futures platform, while maintaining an ownership stake in the CBOE Stock Exchange.

Shares of CBOE were recently 1% lower at $27.61.

CBOE reported the SEC investigation in its annual report filed with regulators this week. The company's markets, like other exchanges, operate as so-called self-regulatory organizations, which carry oversight and enforcement authority over their own platforms.

"The SEC is investigating CBOE's compliance with its obligations as a self-regulatory organization under the federal securities laws," officials for the exchange wrote in the report. "The company is cooperating with the investigation, which is ongoing, and is conducting its own review of its compliance."

The CBOE investigation was disclosed as U.S. securities markets' model of self-oversight has come under increased scrutiny from lawmakers and investors following the late-October bankruptcy of MF Global. A shortfall in client funds at that firm, as well as its messy bookkeeping cited by regulators, have raised questions around the audits carried out by MF Global's primary regulator, CME Group Inc. (CME).

Securities market regulators have launched other recent probes focused on exchanges, including one disclosed last week by BATS Global Markets Inc. That inquiry is focused on ties between stock exchanges and some electronic trading firms, The Wall Street Journal reported.

The SEC last fall sanctioned electronic stock market operator Direct Edge for rule violations and system errors that cost its customers millions in trading losses during two separate occasions over the past year and a half. Use of untested computer code and employee mistakes prompted the SEC to censure the firm, which moved to remedy its operations.

The CBOE introduced options trading in the U.S. when it launched in 1973 and is the sole venue for buying and selling options on widely followed stock indexes like the Standard & Poor's 500 and the Dow Jones Industrial Average.

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

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