We are upgrading our recommendation on CBOE Holdings to Neutral
given its commendable recovery in volumes and controlled expense
guidance. The third-quarter earnings also topped the Zacks
Consensus Estimate, driven by improved transaction and market data
fees. These were partially offset by lower rate per contract, while
higher expense restricted margins' growth. Absence of long-term
debt and low capital requirements limit balance-sheet risks, while
improved operating cash flow facilitates effective capital
deployment. A diversified product portfolio and core competencies
fuel future growth prospects raise optimism. However, industry
volatility and sluggish credit quality, amid intense competition
and challenging regulations keep us on sidelines.
Based in Chicago, Illinois, and founded in 1973, CBOE Holdings
Inc. is a leading derivative exchange in the U.S. trading in stock
or equity options, index options, exchange traded-products (ETP)
including exchange traded- funds and notes (ETF and ETN) options
and futures products.
CBOE Holdings became a Delaware corporation in 2006 and went
public in Jun 2010. The demutualization in Jun 2010 brought into
effect three stand-alone exchanges with CBOE Holdings as the
parent. These include:
Chicago Board Options Exchange Inc. (CBOE): This is the primary
exchange for trading of listed options through both electronic
trading and open outcry under a hybrid trading model.
C2 Options Exchange Inc.: This is the all-electronic exchange
for trading options executed on a separate fee model. C2 became
functional in 2010.
CBOE Futures Exchange LLC (CFE): This is the all-electronic
futures exchange regulated by the Commodity Futures Trading
Commission (CFTC), while all trades are cleared by the Options
Clearing Corp. (OCC). It is operational since 2004.
CFE particularly trades in the CBOE S&P 500 Volatility Index
(VIX Index) futures (VX), Mini-VIX (VM) futures, S&P 500
Variance (VA) futures, CBOE Nasdaq-100 Volatility Index (VXN)
futures (VN), CBOE Gold ETF Volatility Index (GVZ) security futures
(GV), CBOE Crude Oil ETF Volatility Index (OVX) security futures
(OV), CBOE Emerging Markets ETF Volatility Index (VXEEM) security
futures (VXEM) and CBOE Brazil ETF Volatility Index (VXEWZ)
security futures (VXEW).
Overall, CBOE Holdings derives its operating revenues from
transaction fees (69% of total operating revenue in 2013), access
fees (11%), exchange services and other fees (7%), market data fees
(4%), regulatory fees (6%) and other revenues (3%). The company had
staff strength of 650 employees at the end of Dec 2013.
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