Options Exchanges Spar Over Stock Indexes In Illinois Court

The Chicago Board Options Exchange and its longtime rival, the International Securities Exchange, traded charges Wednesday in a long-running dispute over who has the right to trade options contracts tied to major stock indexes.

The CBOE and stock-index developers sought to defend in a Chicago court against arguments that the ISE ought to be able to list options on stock market benchmarks like the S&P 500, despite the CBOE's long-held licenses on the indexes.

"If companies like ISE can come in and cherry pick the most successful of these products after a company like the CBOE has invested in popularizing these products and building liquidity, we are not going to see the kind of vibrant industry we see today," said Robert LoBue, counsel to CME Index Services, a unit of CME Group Inc. (CME) that took over ownership of the Dow Jones indexes earlier this year.

Attorneys for the ISE fired back that the values of stock indexes reside in the public domain, and therefore should be open to other options exchanges to use; they also said that allowing multiple listing of stock index options would push trading costs down and save investors billions of dollars each year.

Trading the products on multiple exchanges could provide "enormous price competition and an enormous benefit to the public," said Andrew L. Deutsche, counsel to ISE.

Both sides are seeking summary judgments in their favor on the matter. Judge William O. Maki said he had "no insight" as to what his decision would be, but that he intended to issue a ruling at 11 a.m. CDT on July 8.

The three-and-a-half-year-old dispute between the market operators has taken on added weight as the CBOE speeds toward a long-planned initial public offering slated for mid-June.

The CBOE's value, seen around $2.53 billion, has been underpinned by its index options franchises, which let investors hedge against movements in stock market measures like the S&P 500 or the Dow Jones Industrial Average. This month the CBOE has captured 93.5% of all trading in index-based options; its share of options on stocks and exchange-traded funds, where the exchange competes against the other seven U.S. options markets, is 26.8%.

CBOE began trading stock index options in 1983, but in November 2006 the International Securities Exchange sought a judgment in New York that would let it offer its own contracts on the S&P 500 and Dow Jones Industrial Average without obtaining licenses from the index developers.

The move followed a successful legal challenge by the ISE to list options on exchange-traded funds--including some tied to moves in major equity benchmarks--without a license.

CBOE responded to the ISE's November 2006 action with its own lawsuit in Illinois state court, joined by McGraw-Hill Cos. Inc. (MHP)and Dow Jones & Co., the respective owners of the S&P 500 and the DJIA. Earlier this year, Chicago-based derivatives exchange operator CME formed a joint venture to take over ownership of the Dow Jones indexes.

Dow Jones & Co., the publisher of this newswire, is owned by News Corp. (NWSA).

Deutsche, arguing Wednesday for ISE, said that the major indexes are so ingrained in the minds of investors that their value could not be harmed by other exchanges trading index options. He said it was like trying to limit Las Vegas gambling on televised sports events.

"Somebody gets paid at the end of the day, and it's determined by the public score of the game," he said.

Paul Dengel, counsel for the CBOE, said that this approach amounts to penalizing the big index providers for being successful, while ignoring the time and money CBOE spent over the last three decades making untested products a success.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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