CBOE wins four year battle to stop ISE listing S&P options

CBOE wins four year battle to stop ISE listing S&P options

Judge William Maki in the Circuit Court of Cook County, Illinois, upheld CBOE’s challenge, banning the New York-based options exchange from offering options linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial Average.

He also forbade the Options Clearing Corporation to clear such contracts.

A spokesperson for ISE, owned by Deutsche Börse’s Eurex, said: “We believe this result is incorrect based on the facts and the applicable law in this case, and we will proceed to appeal this decision.”

The OCC said it would abide by the ruling, Associated Press reported.

The judge said: “ISE is permanently restrained and enjoined from listing or providing an exchange market for the trading of DJIA and/or S&P 500 index options. The court finds that the trading of index options on the Dow Jones Industrial Average and S&P 500 by ISE would misappropriate the index providers’ rights in their indexes.”

Bill Brodsky, CBOE chairman and CEO, was delighted with the decision. “After nearly four years of defending our contractual right to exclusively list and trade these index products, we are elated that the time, energy and resources needed for litigation may now be redirected to focus on new initiatives to better serve our customers and benefit our shareholders,” Brodsky said. “No third party should be able to interfere with contractual licensing agreements. Nor should any exchange have a free ride on the enormous investment CBOE made in creating options on these indexes and in developing and marketing them for over two decades.”

The legal battle between the two leading US options exchanges began in 2006 when ISE suid the CBOE to end its exclusive hold, and the CBOE countersued ISE and the Options Clearing Corporation.

Public already

CBOE claimed it had an exclusive licence to offer options linked to the indices, but ISE said it could offer options without a licence because the indices’ values were in the public domain.

The CBOE was latterly joined in its action against the ISE and the OCC by the McGraw-Hill Companies, owner of the S&P indices, and CME Group, which recently acquired Dow Jones Indexes.

CBOE’s battle to continue operating its exclusive suite of index options has its roots in its dominance of its US index options trading.

ISE never actually listed the two options, though it does have other options linked to S&P and Dow Jones indices, such as the S&P 400 Midcap Index, as well as exposure to the S&P 500 through exchange-traded funds such as its options on the iShares S&P 500 Index Fund.

CBOE’s continued leading market share in the US options market relies partly on its dominance of the ‘index/other’ category.

This field accounted for just 7.8% of all options cleared by the Options Clearing Corporation for the eight US equity options exchanges in June. But CBOE has a 93% market share of index/other options. ISE is the only serious competitor, with 4.3%.

That strength keeps CBOE’s market share of all options at 29.3% in June, though Nasdaq OMX PHLX has been catching up with it in single stock options, where their market shares are 24.0% and 22.3%.

ISE is now third in both pure options and all options, with market shares of 20.0% and 18.7%.

The S&P 500 is by far the most actively traded index option, with 15.1m contracts cleared in June – 63% of all the index/other options handled by the OCC. Those contracts bore $37bn of premiums.

Colin Packham, Sydney cpackham@fow.com

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