CBOE loses marketshare in October

The Chicago Board Options Exchange’s marketshare dropped last month to its lowest in a year and half.
The CBOE, which plans to change its corporate structure in a move that would pave the way for an initial public offering, remains the biggest U.S. options exchange.

But its share of U.S. options trading fell to a little more than 30% last month, based on preliminary figures from the Options Clearing Corp. That’s the lowest since January 2006.

Lower volatility damped interest in options tied to the S&P 500 and other well-known and heavily used stock indexes, which are traded only at the CBOE.

Investors tend to favor such broad-based indexes over individual equity options during wild market swings. Rival exchanges also used a variety of payment methods to draw orders away from the CBOE.

The “competitive paradigm of the business is shifting rapidly,” CEO William Brodsky told CBOE members in a newsletter distributed late last week, expressing concern over the options market’s recent shift to trading some contracts in one-penny increments rather than the traditional five- or ten-cent quotes.

The change has led to “new, less predictable trends in volume and order flow,” the CBOE said in a response to an inquiry this week from Crain’s. “We are studying the impact of the pilot and evaluating our most effective competitive response.”

The CBOE may also need to increase the amount of money it pays to entice brokers to bring it their business.

The move to penny-based trading was mandated by the Securities and Exchange Commission for some options, but the lion’s share still trade in wider increments, leaving enough fat in market-makers’ margins to allow them to pay for order flow.

The Philadelphia Exchange, which has put itself up for sale, raised its payments to brokers recently and has seen its marketshare pick up.

Trading at CBOE did rise overall in the month, to about 89 million contracts from about 63 million last year. And investors don’t seem to have lost interest in the exchange, either: A CBOE seat sold Wednesday for a record $2.9 million.