CBOE Shares Coming to Market

The Chicago Board Options Exchange, which is right across the street from where I’m sitting as I write this, is bringing their shares to market tomorrow, 11.7 million of them initially under the ticker CBOE. They are looking to raise at least $339 million with Goldman Sachs as the lead underwriter; shares are anticipated to be priced around $27-$30.

The CBOE, which spawned from the Chicago Board of Trade (now the CME group) back in 1973, was the first options exchange. Prior to that, options traded over the counter and pricing options was a bit like triangulating Newton’s theory with an abacus. That same year, two men changed the future of options forever. The Black-Scholes model was created by Fischer Black and Myron Scholes and conveyed in their 1973 paper, “The Pricing of Options and Corporate Liabilities” – Robert C. Merton later expanded on the model. This model and the creation of the CBOE were both major steps in the standardization of options pricing and the beginning of the options exchange system. 1973 was a slow year for options, with just 16 stocks listed and only call options trading on them.

Fast-forward 37 years and now there are eight different equity options exchanges. Options now trade on Futures, the foreign exchange market (FX), and other products as well. If you take a snapshot of a day’s volume, the CBOE manages the lion’s share of index options volume and the equity options market share is a bit more evenly distributed among several exchanges. Overall, the CBOE handles roughly 30% of the U.S. market share of equity and index options volume. The data below is courtesy of the Options Clearing Corporation (OCC).

Options volume from June 11

Options volume overall has been rising exponentially and as more and more investors become comfortable with the concepts of trading options, that number should continue to increase. This chart is from the CBOE SEC registration filling.

(click to enlarge)

Exchange listings in general have been closely watched and several including CME Group CME, NYSE Euronext NYX, and the IntercontinentalExchange, Inc. ICE have all had their time in the sun and have come way down off their highs. The CBOE initial public offering is the talk of the week and frankly one of the more anticipated offerings this year (according to several sources). The CBOE offering is one of six this week, and unlike many of the offerings this year, which have had to postpone or lower pricing due to the current economic and market climate, the CBOE IPO will most likely command a premium. For the 930 seat holders of the CBOE, they are already seeing a premium even before the IPO, with seats going for around $2.5 million each. I remember back in 2002, you could have scooped one up for $130,000; now there’s a trade I missed J. Each seat will convert into 80,000 Class-A shares.

Here is the latest market on a CBOE seat as of 6/14/10.

According to CBOE.com: