by Reuters | Posted today at 8:42 a.m.
CBOE Holdings Inc faces a high-stakes ruling Thursday in a long-running legal challenge to its exclusive right to list options on U.S. stock benchmarks such as the Standard & Poor’s 500 index.
The parent of the Chicago Board Options Exchange relies on exclusively listed options indexes for 32 percent of its transaction fee revenue. Losing that exclusivity could have a “material adverse effect” on financial performance, CBOE said in a recent filing with the U.S. Securities and Exchange Commission.
But a favorable ruling would vindicate Chief Executive Officer William Brodsky, who has long espoused the view that CBOE has a right to profit from the exclusive contracts because it was the first to come up with the idea of listing index options.
“Some of our competitors would like to share the fruits of our labor without having to shoulder any cost or risk,” Brodsky wrote to CBOE members in a 2006 memo. “No matter how this strategy is cloaked, it is free riding and is ultimately anti-competitive.”
The ruling, which investors are watching closely, will come less than a month after CBOE’s $390 million initial public offering. CBOE shares were down 0.6 percent at $29.03 in trading before the market opened, slightly above their IPO price but far below the close on June 15, when trading in the stock began.
The case dates from late 2006, when CBOE rival International Securities Exchange sued S&P parent McGraw Hill Cos and Dow Jones & Co in federal court in New York over the exclusive deals.
ISE, which is now owned by Deutsche Boerse AG’s Eurex futures market, argued that such deals violated federal copyright law and asked the court to let it list options on the indexes without licenses.
Two weeks later, CBOE and the index owners filed their own lawsuit against ISE in Illinois state court, seeking to bar the company from listing unlicensed index options.
It is this case in which Cook County Circuit Court Judge William Maki has said he will issue a ruling on Thursday. Observers say three outcomes are possible: Maki could rule in favor of one or the other of the exchanges, or could set a date for a trial.
A victory in the current case would give ISE and other options markets big opportunities for revenue and trading volume.
Since its inception in 2000, ISE has positioned itself as the standard bearer for competition. Its launch coincided with a U.S. antitrust settlement that forced existing options exchanges to begin competing directly with one another by listing options on the same underlying stocks.
As the first all-electronic options exchange, ISE forced incumbent floor-based exchanges to ramp up their computer based technologies. Now most U.S. stock options trading takes place electronically.
After it filed the case against CBOE, ISE printed big red buttons imploring, “Free SPX,” the ticker symbol for the S&P 500. CBOE members fought back with buttons that read, “Innovation, not Litigation.”
At the time, ISE was locked in battle with CBOE for the top spot in the industry. Since then, its market share has plunged as competitors lured business. ISE now is the No. 4 player in the U.S. options industry, behind CBOE, NYSE Euronext and Nasdaq OMX Group Inc.
Joining CBOE in its suit is CME Index Services. The CME Group Inc CME.O unit became party to the lawsuit after it bought a 90 percent stake in a joint venture with News Corp’s NWSA.O Dow Jones & Co for the Dow Jones indexes business.
A ruling is expected around noon EDT.