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CBOE first-quarter profit beats Street; defers start to longer day

Traders in the CBOE Stock Exchange (CBSX) pit at the Chicago Board Options Exchange (CBOE) execute orders March 5, 2007. REUTERS/Frank Polic
Traders in the CBOE Stock Exchange (CBSX) pit at the Chicago Board Options Exchange (CBOE) execute orders March 5, 2007. REUTERS/Frank Polic

By Ann Saphir

(Reuters) - CBOE Holdings Inc , which runs the oldest U.S. stock-options trading venue, said on Friday that quarterly earnings rose on a trading surge of its lucrative contracts for two of the most closely watched stock indexes.

Shares rose 4.3 percent to $39.10 on the Nasdaq.

But in a potential setback to the company's future growth, CBOE Chief Executive William Brodsky indefinitely deferred plans to extend trading hours for one of the contracts - futures on the CBOE Volatility Index <.VIX>.

The operator of the Chicago Board Options Exchange had planned to start extending the hours for the contracts at the end of this month, eventually offering nearly around-the-clock trading in its proprietary futures and options to get more business overseas.

A half-day outage at the Chicago Board Options Exchange last week and a more limited outage on Thursday, exposed software problems that came about as it prepared for the longer trading day.

"We are taking a deep breath," Brodsky said. "Our concern is, let's stabilize things, because when you make a change like this, you are basically running your computers all day long." A consultant will start reviewing CBOE systems on Monday.

Asked how long the delay will last, he said, "We will announce a date when we are comfortable."

CBOE's proprietary products, led by futures and options on the VIX and the Standard & Poor's 500 Index <.SPX>, are a centerpiece of the exchange operator's strategy.

Brodsky, who will become executive chairman later this month, and his second-in-command and incoming CEO, Ed Tilly, have vigorously defended CBOE's right to list the products. Rivals have unsuccessfully challenged that exclusivity in court for years.

The contracts are used by institutional and retail investors to bet on and hedge against swings in U.S. stock markets.

First-quarter results, released on Friday, underscored their importance.

Net income at the operator of the Chicago Board Options Exchange rose to $41.8 million, or 48 cents a share, from $32.9 million, or 37 cents a share, a year earlier.

Excluding accelerated stock-based compensation expenses, the profit was 50 cents a share, better than the 47 cents that analysts expected, on average, according to Thomson Reuters I/B/E/S.

The increase came despite a sharp drop in trading of options on individual stocks, which are also offered at CBOE's 10 rival exchanges.

By contrast, trading in CBOE index options last quarter jumped 28 percent from a year earlier to 1.5 million on an average day.

Including both CBOE's options and futures exchanges, index-based contracts accounted for 37.9 percent of total trades, compared with 25.4 percent a year earlier, the company said.

By revenue, the share is even bigger, Friday's report showed. CBOE attributed more than 60 percent of its transaction fees to the contracts.

Operating revenue in the quarter rose 18 percent to $142.7 million.

The delay in the longer trading day may affect CBOE growth. Since the contracts are licensed and not offered at any other exchanges, CBOE is able to command much higher fees for them: 67 cents, on average, compared with 14 cents for single-stock options.

Last week's outage prevented investors from getting access to the exclusive contracts, but Tilly said he did not expect the outage to limit CBOE's ability to list the products exclusively.

The preparations for the longer trading day will not boost expenses beyond current projections, CBOE Chief Finance Officer Alan Dean said on the call.

Brodsky said the exchange was working with regulators and that the delay in allowing investors access to its stock-index products was "unacceptable."

Although CBOE has a backup system in case of trading disruptions, it takes a long time to get up and running. Brodsky said he wanted a "faster alternative backup for our proprietary products," but did not offer specifics.

(Reporting by Ann Saphir; Editing by Jeffrey Benkoe)

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