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FMX | Connect – www.fmxconnect.com - (Reported 6/09/2010)

 

 

 

 

 

 

The CBOE has 2 business segments:

1. Monopoly-type non-fungible index options

2. Competitive fungible ETF and single-stock options

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The monopoly-type segment is protected by exclusive licenses that expire in 2018. Therefore, the multiple should not assume perpetuity.

Furthermore, regulatory changes under SEC consideration may limit the price that CBOE charges for these exclusive products that may cost the CBOE between $15m to $25m p.a.

Finally, Volumes in CBOE exclusive index options are growing modestly . . .

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. . . while volumes in options on ETFs, which are traded on multiple exchanges, are substituting for index options -  SPY ETF options are growing at 66% p.a.

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The fungible ETF and single-stock options is headed towards the equity-type of fierce competition.

Liquid single-stock and ETF options are shifting away from quote-driven venues like CBOE and ISE to order-driven venues like NYSE and PHLX as HFTs compete against market makers with tighter spreads.

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Narrower spreads are evaporating market maker profits, which are forced to scale back payment for order flow, resulting in more client orders being directed to the marketplace offering the lowest spreads – ie, order-driven books.

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In order to protect its market share, CBOE extended liquidity payments, bringing net revenue capture down. CBOE abandoned the incentive program in 2010.

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Competition is intensifying with the entry of BATS. By the time the rollout of 6,000 option names conclude, BATS plans to aggressively cut fees to build market share.

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CBOE’s access fees would initially contribute with $99.6m p.a. compared to ISE’s $13m. The excess fees can be sustainable if spreads in exclusive products remain wide, but electronic access could decimate this excess revenue.

Electronic access at the NYSE fueled growth in volumes but reduced the number and the price of floor brokers and specialists trading permits.

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At IPO’s midpoint range of $28, CBOE’s 2011 P/E would be 20.4x. CBOE is likely to trade at a takeover premium given its scarcity value and the number of potential bidders. CME could pay as much as $52 and ICE $44 per CBOE share in a non-dilutive deal. SEC’s oversight over CBOE may discourage CME.

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Adding 40% takeover premium to CBOE’s standalone FV, we obtain a price per share of $32

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Source: ERDESK

 

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