CBOE Cancels Pacific Exchange Merger
In a surprise move, the Chicago Board Options Exchange on Thursday voted to terminate its agreement to merge with the Pacific Exchange, citing antitrust concerns by regulators and a need to devote attention to new trading technology.
Under the merger deal announced in late July, the 116-year-old Pacific Exchange, or PCX, would have become a division of the CBOE. Recently, both boards hammered out an agreement that was to go before hundreds of members of the two exchanges.
But CBOE directors voted to cancel the merger at a Thursday morning meeting after the Justice Department said it planned an “extensive review” of the deal. Earlier this week, CBOE executives said they had hoped the merger would go forward and asked regulators to narrow the scope of their antitrust inquiry.
“CBOE’s decision to terminate discussions with PCX was made strictly on the basis of our available time and resources,” said William J. Brodsky, chairman of the CBOE, the world’s largest options exchange. “The board’s decision reflects in no way on the high regard we have for the PCX. . . . At this point in time, however, we must focus our efforts on other time-sensitive initiatives.”
The CBOE and the PCX are the No. 1 and No. 3 exchanges for trading stock options--contracts that allow investors to make bets on stocks or hedge their portfolios with relatively little money down. The PCX trades options on its main trading floor in San Francisco. It also operates a stock trading floor in downtown Los Angeles.
Options trading is a fast-growing business, but, as with securities markets in general worldwide, there has been a rash of consolidation as options exchanges seek to cut costs and stay competitive.
The merger’s cancellation caught PCX executives off-guard. Its board is expected to meet this morning. Exchange members reached late Thursday were also surprised, noting that the merger had been in the works for nearly six months.
“This is a bombshell,” said David Herron, manager of equity trading floor operations for Charles Schwab & Co., which holds several PCX seats. “It’s awful far along in the process for this to fall apart. They should have anticipated the Justice Department looking into this. It’s almost as if they are looking for an excuse.”
PCX spokesman Dale Carlson said exchange executives would have no comment until its board met.
“Ultimately, what we have to do now is kick their butts,” said David Hultman, a D.A. Davidson equity trader who is on the PCX’s executive committee. “Just like the jilted lover, we have to look for someone better.”
The Justice Department’s inquiry centered on issues related to the workings of two exchanges rather than merger terms, sources said. A CBOE spokeswoman said regulators’ requests for information would take at least another four to six months to fulfill.
The department has also requested information from the Philadelphia Exchange, the nation’s fourth-largest options market, and the American Stock Exchange, the nation’s second-largest exchange, which struck a deal last year to buy the Philadelphia.
A spokesman at the National Assn. of Securities Dealers, the governing body of the Nasdaq market, which recently merged with the Amex, said, “We’re still in discussions with Philadelphia,” adding that the NASD did not know enough to comment on the CBOE-PCX situation.
Some industry watchers have said the NASD might be interested in acquiring the CBOE or the PCX, but an association spokesman declined to comment.
In a statement released Thursday, the CBOE also cited competitive pressures related to the development of its screen-based trading program, expected to be launched sometime after 2000.
In November, the CBOE got some surprise competition when online brokerage E-Trade Group Inc. and other broker-dealers said they plan to start a new electronic stock-options exchange that will offer trading at a much lower cost than the four major options floors.
