Exchange Merger Faces Problems
A possible merger of the Pacific Exchange and the Chicago Board Options Exchange may get hung up over the price of traders' seats, members of both exchanges said Tuesday.
"My biggest concern is that we will be taken under (the CBOE's) plan," said an executive at a Pacific Exchange member firm, who asked to remain unidentified. "We would have to have something that keeps the memberships separate."
The reason: a deal the CBOE has with its sister organization, the Chicago Board of Trade. Essentially, a trader who buys a seat on one exchange gets the right to buy and sell derivatives on the other exchange as well.
That's becoming even more of a concern as the CBOT - which handles primarily futures on agriculture products, commodities and financial instruments - moves increasingly to electronic trading. As trading shifts from "open outcry" to screen-based trading, the value of the seats will drop faster than orange juice futures during a bountiful harvest.
Already, the threat of these "exercisers" has driven down the price of seats on the CBOE to about $430,000 from about $700,000 last summer.
"The fact is, they are diluting our value. They are leeching on us," said Paul Liang, who owns seats on the CBOE. Liang is the single largest seatholder on the Pacific Exchange, with 33 seats. A seat on the Pacific Exchange costs about $300,000, nearly one-third less than a seat at the CBOE.
Any plan to merge the exchanges would be subject to a vote by the seat-owners, who, in effect, own the exchange. To be sure, the seat-owners haven't yet seen any details of a possible merger plan.
CBS MarketWatch first reported Friday that merger talks were underway between the Pacific Exchange, the country's third-largest options floor, and the CBOE, the largest options floor. The Exchanges have confirmed the report, although Pacific Exchange Vice President Dale Carlson declined to discuss the state of talks on Tuesday.
"I'm not dead-set against it," Liang said. "But it has to enhance value - at the end, you vote with your pocketbook."
Other people who own seats on both exchanges, asking their names not be used, echoed his concerns. Some of the members, in their request for anonymity, explained that they sit on various boards and risk alienating fellow members.
A seat allows a firm or person to trade on an exchange, with prices determined by supply and demand. The seat owner also has an equity stake in the exchanges. The Pacific Exchange has 552 seats and the CBOE has 931 seats.
Liang initially refused to back the June 25 merger between the Nasdaq Stock Market and the American Stock Exchange. Instead of voting against the deal, which was approved last month, Liang sold his seats to Spear Leeds & Kellogg, a options specialist firm.
Soon after the Nasdaq/AMEX merger, the Philadelphia Stock Exchange said it is planning to join the pairing. Its member firms haven't yet voted on the deal. Thasparked renewed interest among other exchanges to get together as a way to reduce technology spending and improve the efficiency of trading.
The Pacific Exchange, based in San Francisco, trades both options and stocks. It also has operations in Los Angeles. Its equity trading business is frequently called the Pacific stock exchange.
Brenon Daly, CBS MarketWatch