The CBOE remained afloat, but the market was still roiling. Options trading was expanding exponentially, at a rate of more than 12 percent per year, as investors became more sophisticated about risk allocation. More business meant tougher competition. In 2004, the Boston Options Exchange, a second all-electronic entity, opened. Two years later, the NYSE returned to the market when it bought Archipelago.94
The CBOE had little choice but to continue its own transformation. In structure and governance, the exchange still adhered to the traditional member-owned, non-profit model. But public firms had advantages of flexibility and resources that member firms lacked. In 2000, the Chicago Mercantile Exchange became the first major exchange to "demutualize," or convert from a member-owned to a shareholder-owned company. Nasdaq and the New York Stock Exchange demutualized in succeeding years. In 2006, Brodsky started the CBOE down that road, converting to a "for-profit" business model, with streamlined infrastructure, a scaled-down operating budget, and a new policy of generating surpluses rather than breaking even.95
At the same time the CBOE branched out, establishing its own futures and stock exchanges. The complexion of the trading floor continued to evolve as small market maker firms sold out to the big brokerages. Electronic trading, spurred on by an alliance with an on-line futures and options exchange, drained away ever more business. The CBOE was fortunate to produce a uniquely innovative product in a period of market growth, introducing VIX Options, products tied to the CBOE's own volatility index, in the late 2000s.96
As the CBOE moved toward public status, its role as a self-regulatory organization was redefined. Through a series of "17d-2 Agreements," the CBOE, like other exchanges, transferred responsibility for member firm regulation, sales practice enforcement and market surveillance to the NASD, which became the Financial Industry Regulatory Authority in 2007.97
In late 2009, the last impediment to the demutualization of the CBOE was overcome when the exchange reached a settlement with the members of the CBOT about residual rights. After nearly forty years, the last link between the old Chicago Board of Trade and the upstart organization launched in its smoking lounge was broken. In June 2010, the options exchange demutualized concurrent with a highly successful public offering. Henceforth, the future of the CBOE would be up to the market to decide.98
(94.) CBOE Holdings S-4, April 27, 2010, https://www.cboe.org/publish/secfilings/2764080_49501T92_CNB.PDF, 104, 110.
(95.) January 5, 2010 Interview with William Brodsky
(96.) Barron's, May 31, 2010; Financial Times, January 11, 2006, and February 22, 2006; CBOE Annual Reports, 2007 and 1994.
(97.) CBOE Holdings S-4, 133-34.
(98.) February 26, 2007 Comment Letter on Chicago Board Options Exchange from Nickolas J. Neubauer to SEC; May 30, 2007 Memo from the Office of the Chairman to the Chicago Board Options Exchange Members on agreement with IntercontinentalExchange (ICE)
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