Options exchange CBOE files for $300 million IPO as it converts from member-owned organization

Options exchange CBOE files for $300 million IPO

NEW YORK — The last major private exchange left in the U.S., the Chicago Board Options Exchange, filed for an initial public offering of up to $300 million Thursday.

The CBOE plans to convert from a member-owned organization to a publicly traded corporation known as CBOE Holdings Inc. that analysts say could be worth up to $5 billion.

The Chicago exchange, the largest platform for options trading in the U.S., did not say when it plans to go public or how many shares it hopes to sell. The CBOE has wanted to go public for a long time. It settled a dispute over payment for ownership with the CME Group Inc., which operates the Chicago Mercantile Exchange and the Chicago Board of Trade, in August 2008, clearing the way for an IPO.

“It’s the last of the bigger, well-known exchanges” to go public, said Raymond James analyst Patrick O’Shaughnessy. Other popular exchanges, NYSE Euronext, Nasdaq OMX Group Inc., CME Group and IntercontinentalExchange Inc., are already public companies.

The CBOE is making its move after years of growth. Founded in 1973, the CBOE was the world’s first marketplace for options — financial instruments whose value depends on an underlying asset, such as a stock.

Options are useful tools for investors because they can help hedge risk. The CBOE is famous for creating products such as the VIX, a popular gauge of risk known as the market’s “fear index.”

The CBOE’s trading volume exploded over the past decade, with 1.13 billion contracts changing hands in 2009, as technology helped reduce costs, and as hedge funds and other money managers increasingly traded in derivatives and other new financial instruments. Daily volume last year was 4.5 million contracts, down slightly from 4.7 million in 2008 as the recession bit into trading activity. In 2007, daily trading volume was 3.8 million.

The CBOE could be worth up to $5 billion if current members have to pay monthly fees to continue trading after it goes public, O’Shaughnessy said.

But growth has created challenges. Even as trading of derivatives has jumped, the Securities and Exchange Commission and the Obama administration have proposed measures regulating the trading of financial instruments that could hurt the CBOE’s revenue.

New rules on short selling take effect in May. A proposed ban of “flash orders,” which give investors a split-second edge in trading, and other legislation related to reform of financial regulation that impacts traders’ behavior could have a “material adverse affect” on the business, CBOE said in its filing with the SEC.

The company is also facing increasing competition from other exchanges. Its share of options traded in the U.S. fell to 31 percent last year from 45 percent in 2000.

There have been big acquisitions in recent years. The derivatives market is the fastest-growing division for exchanges, said Rafay Khalid, a Standard & Poor’s Equity analyst, and in 2008, the two major U.S. exchanges both made purchases to bolster their options divisions. NYSE Euronext bought the American Stock Exchange, while Nasdaq OMX acquired the Philadelphia Stock Exchange.

CBOE could be a takeover target as well. Other exchanges have been acquired or sought out combinations following IPOs. The Chicago Board of Trade went public in October 2005 and became the target of the Chicago Mercantile Exchange Holdings Inc. The buyout was completed in July 2007. By spring 2008, CME had offered to buy the New York Mercantile Exchange’s parent, which had gone public in November 2006. The NYSE went public in March 2006; by May, it had proposed acquiring Euronext NV. The two finished combining in April 2007.

There has been speculation of interest for CBOE from other exchanges over the years, O’Shaughnessy said.

“Consolidation can make a lot of sense for exchanges,” he said. Combining trading floors cuts down on fixed costs.

CBOE says it wants to grow by launching C2, an all-electronic market, later this year and introducing more proprietary trading products such as the VIX.

It also hopes to capitalize on proposed regulation. The push for investors to move from unlisted, “over the counter” trading to more visible trading on exchanges could boost its business, CBOE said.

CBOE says it plans to pay a yearly dividend of 20 to 30 percent of adjusted income from the previous year.

In 2009, the company earned $106.5 million, down from $115.3 million the previous year. In the past five years, however, net income has grown nearly tenfold.

Revenue in 2009 rose 2 percent to $426 million from $416.8 million.