In the battle to wrest trades from the over-the-counter market, the Chicago Board Options Exchange is making tremendous strides.
During the first 10 months of last year, the CBOE traded about 10 million FLEX contracts. That’s up from 3.5 million contracts for all of 2009 and about 1 million for 2008. A FLEX contract–it stands for "flexible exchange"–is an options contract with non-standard terms that can be tailored to the non-standard needs of institutional investors. It is positioned to compete with so-called "look-alike" contracts, which represent a substantial portion of OTC options trading.
CBOE pioneered the FLEX trade in 1993, but the product never caught on because of certain duration and size limitations. The gains of the past year or so are due to several changes CBOE pushed through the Securities and Exchange Commission approval process in 2009: expiration dates two days before and two days after the traditional expiration Friday; elimination of the minimum size requirement; and an extension of maximum terms to 15 years. The last one was done to "appeal to the insurance industry and other end-users offering structured products that might have longer terms than FLEX options previously allowed," a CBOE executive told Traders Magazine.
CBOE is not the only exchange to offer FLEX options–four do–but it has been the most aggressive in championing the product. In equity options, where CBOE traded 9 million FLEX contracts through October, CBOE claims a 62 percent market share. In index options, where it traded 1 million FLEX contracts, CBOE controls "most" of the market, it says.
FLEX volume is still just a drop in CBOE’s bucket: The exchange traded 476 million equity and 229 million index options contracts through October.
