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September 28, 2006

Big Board Specialists Join Forces to Deal Stocks on CBOE

By Peter Chapman

Also in this article

  • Big Board Specialists Join Forces to Deal Stocks on CBOE

New York Stock Exchange specialists are taking their first tentative steps off the Big Board floor.

Three of the seven specialists will invest in and make markets on the Chicago Board Options Exchange's new equity trading market, the CBOE Stock Exchange (CBSX).

The move, executives at the firms and elsewhere say, will allow the specialists to stay ahead of the anticipated fragmentation of listed trading.

Once the Securities and Exchange Commission's Regulation NMS trade-through rule goes into effect next year, some trading of Big Board-listed names is expected to shift away from the New York to competing marketplaces.

At presstime, nearly a dozen new or revamped stock exchanges were all gearing up to grab trading from the New York. CBSX is set to launch in early 2007.

"We will bring our expertise to [the CBOE] to help them win listed volume," Michael LaBranche, chairman and chief executive of LaBranche & Company, told Traders Magazine. "I think we can improve on some of the markets they are making."

LaBranche was joined in its CBSX investment by NYSE specialists Van der Moolen Specialists and SIG Specialists, a unit of Susquehanna Financial Group. The largest options market maker on the Street, Timber Hill/Interactive Brokers, also took a stake.

Collectively, the four broker-dealers will own 45 percent of the CBSX. Van der Moolen got the largest piece of 18 percent with an investment of $9 million. The other three each took 9 percent of the new venture. The CBOE itself will own 46 percent of the CBSX, while smaller investors make up the balance.

All three specialists also make markets in options at the CBOE. Susquehanna was one of the CBOE's original remote market makers in 2004. Van der Moolen and LaBranche joined recently.

At the CBSX they will operate as remote, or electronic, market makers. But they will also each employ a few traders on the floor of the new exchange. CBSX, like the CBOE, will operate as a hybrid manual-electronic exchange.

The CBSX deal is not the first expansion for the NYSE floor-based shops. All three specialists also recently become market makers on NYSE Arca, the former Archipelago Exchange.

In addition, Van der Moolen has become a market maker on the newly formed ISE Stock Exchange, where it invested $3 million for a 3 percent stake.

The chief executive of Van der Moolen Holding, Richard den Drijver, said in a statement that his firm will be "actively participating as liquidity providers and (will) route our natural equity and option liquidity, when possible, to the exchanges (with which) we have an alignment."

Partly behind the specialists' decision to go to the CBOE was their fear that much of the equity order flow now shipped from CBOE options market makers to the NYSE would dry up. Instead, it would be diverted to the CBSX.

"If the equity overflow derived from options trading at the CBOE can be contained within the building," explained Aaron Hantman, president of SIG Specialists, "the marketplace can be competitive for people who want to trade stocks."

Hantman notes that options volume has surged in recent years and that "with options comes stock order flow."