CBOE to Try Stock Trading

But why open outcry, particularly when markets appear to be moving away from it? Mr. Provost said the CBOE's customers have indicated they prefer to have a choice: electronic or open outcry. He said that although 95% options orders are completed through the electronic system, the 5% that trade on the floor account for one-third of all CBOE contracts.

"There are customers ?? 1/2 that will use brokers," he said. "This gives them the choice."

The CBOE's insistence on including open outcry in the new venture is notable given the presence of Interactive Brokers as one of the partners. Interactive Brokers is also a partner in the ISE's all-electronic stock exchange, and Steven J. Sanders, managing director for marketing and business development for Interactive Brokers, said his firm wanted to get involved in both projects specifically as a way to push markets toward electronic trading.

"We have stakes in a number of exchanges," Mr. Sanders said, among them OneChicago and the Boston Options Exchange, as well as of course the ISE and CBOE initiatives. "From our point of view, we like to hook up liquidity to our smart router. If we can do a trade faster and cheaper, that's our goal. We invest in these ventures not because we're going to make a lot of money off them, but because we want to push the industry to do things more efficiently. It's another opportunity for us to have a say in that."

Mr. Brodsky said the CBOE wasn't prepared to disclose the specific cash contributions of the four partners, but he characterized them as being "seven- or eight-figure" amounts. In terms of percentages, VDM Specialists' contribution is 18% of the total, with LaBranche, Interactive Brokers and Susquehanna International each chipping in 9%. The CBOE's contribution will be 46%, mainly via technology, systems and regulatory work. Other smaller investors make up the final 9%.

At the same press conference, Mr. Brodsky announced that the CBOE's board of directors unanimously voted to file an S-4 Registration Statement with the SEC, another step in the process of demutualizing the CBOE and turning it into a for-profit venture.

In the demutualization process, memberships are converted to shares of the new company, according to the CBOE, paving the way for the exchange to pursue an initial public offering down the road.

According to a news release, the CBOE actually began its transition to a for-profit company in January 2006, when it streamlined its operating budget and made other governance changes. The exchange reported that through June of this year, revenues were $129.6 million, up from $98.2 million during the same period in 2005. Income before taxes through June this year was $32 million compared with $8.7 million in the January through June period last year. Retained earnings so far this year were $139.2 million, up from $114.3 million in the first six months of 2005.

"Demutualization provides the 'strategic optionality' necessary to chart the course for years to come," Mr. Brodsky said in a statement. "The conversion of seats to shares allows us to deal in the same currency as our competitors and potential partners at a time when the marketplace embraces the new structure."

In still another announcement, the CBOE said Mr. Tilley, who had been a CBOE member on the board and vice chairman, would take on an executive position at the exchange as executive vice chairman. He will terminate his member status prior to assuming that position, opening the door for John Smollen, currently a CBOE floor director, to succeed Mr. Tilly as CBOE member vice chairman.

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