Next exchange marriage: CBOE & NYSE?

(Reuters) - NYSE Euronext is an early favorite in a possible bidding war over the last unmined jewel of the global exchanges sector: the Chicago Board Options Exchange.

CBOE 's tentative settlement this week of a trading rights spat with the Chicago Board of Trade, now owned by CME Group Inc., places it in the cross hairs of potential acquirers eager to bulk up in the options space.

After a series of blockbuster deals in the past two years, the major U.S. exchanges, including NYSE Euronext and Nasdaq OMX, have said they will take the time to integrate their purchases rather than seek out new headline grabbing acquisitions.

But as the largest options trading market in the U.S., boasting a 33 percent market share, CBOE may prove to be irresistible.
"Their proprietary products make them extremely attractive," said Jon Najarian, founder of optionsmonster.com and a CBOE seat holder. "There is a long list of buyers."
The CBOT settlement allows CBOE to complete its two-year drive to become a for-profit shareholder-owned company from a member-owned organization, a process called demutualization that has been a first step in other exchange mergers.
CBOE holds its crown as the top options exchange thanks in part to its dominance in index options trading, including its exclusive rights to trade Standard & Poor's 500 contracts. According to the Options Clearing Corp, CBOE trades 87 percent of equity index options in the United States.
Analysts estimate CBOE could fetch about $4 billion.
While all the major exchanges could win market share in the fast-growing, high margins options business by buying CBOE , NYSE Euronext may have the most to gain.
"The NYSE could buy CBOE if the price is right, because CBOE 's index options fit in very well," said Diego Perfumo, an analyst with Greenwich, Connecticut-based Equity Research Desk.
Its purchase of the American Stock Exchange, expected to close in the fall, is supposed to beef up NYSE Euronext's options trading beyond the 12 percent market it has through its Arca unit. But AMEX's share of options trading has dwindled to less than 6 percent from about 10 percent last year.
Despite a lavish spending spree in the past two years, including a $14 billion deal with exchange operator Euronext, NYSE has the financial means to make another acquisition if necessary, analysts say.
"The larger issue is whether they can manage another acquisition," said Brad Hintz, an analyst with Sanford C. Bernstein.
IF NOT NYSE, WHO? If NYSE decides to pass up the opportunity, other exchanges could be tempted to jump into the fray, though each has a reason not to.
The acquisitive, cash rich CME Group, which in the past year has bought the Chicago Board of Trade for $12 billion and is trying to close its contentious $9 billion purchase of the New York Mercantile Exchange, might seem the perfect candidate.
"CME seems to pop up every time there's consolidation," said Sang Lee, an analyst with consulting group Aite group.

But ownership of CBOE and its equity options business, would mean U.S. Securities and Exchange Commission oversight, rather than the more accommodating U.S. Commodity Futures Trading Commission. That, Perfumo says, is something CME wants to "avoid at all costs." CME expressed concern after Treasury Secretary Henry Paulson's proposal in March to merge the SEC and CFTC, a move few expect to happen any time soon.

Analysts don't expect a CBOE -CME deal would attract the attention of antitrust regulators because the exchanges trade in different products.

But if Deutsche Boerse were interested, it likely would attract antitrust scrutiny because they both trade in equity options since the German exchange bought the International Securities Exchange — CBOE 's largest competitor. But that point is moot, Perfumo says, because the price for CBOE , even if as low as $3 billion, would force the German exchange to issue shares and be too dilutive.

And Nasdaq OMX, whose purchase of the Philadelphia Stock Exchange will give it another 18 percent share of the options market once it closes later this month, might find CBOE too big to swallow for shareholders' taste.

Given the pounding exchanges' stocks have taken this year and a slow initial public offering market, CBOE could simply opt to bide its time.

Nothing is expected to happen for year while the CBOE -CBOT settlement waits for CBOE member and SEC approval, leaving the exchanges to mull their options.

"The CBOE is a stronghold for options and it wouldn't dilute NYSE shares," said Perfumo. "NYSE is the most likely candidate."