As he gets ready to convert the Chicago Board Options Exchange to a shareholder-owned company, CEO William Brodsky must find a way to sweeten the deal for exchange members concerned theyll be shortchanged in the process.
Mr. Brodsky got closer to his goal this month, when a Delaware judge approved the settlement of a long-running dispute with CME Group Inc.s Chicago Board of Trade. The ruling cleared a major obstacle to Mr. Brodskys conversion plan, a key step before any initial public offering or takeover involving the 36-year-old exchange.
But he now faces questions from members over the income theyll lose if they trade their seats for CBOE shares. Amid a turbulent stock market, its unlikely they would be able to make up for the lost income with a quick payoff from an IPO or buyout.
Without a plan to plug the gap, the chances of approving the (conversion) are not good, said CBOE member Chuck Sorsby, who owns five exchange seats. Mr. Sorsby said his fellow members are adamant about the issue.
Many of CBOEs 930 members, including Mr. Sorsby, rent their seats for around $120,000 a year to traders. After the so-called demutualization, traders wanting to use the exchange would pay the CBOE directly, boosting the value of the company but taking away a key income stream for leasing seat-holders like Mr. Sorsby.
Conversion to a shareholder-owned company is critical for the CBOE, the biggest U.S. options market. All its member-owned rivals made the change years ago, enabling them to list their shares or sell out to competitors. Although Mr. Brodsky has boosted profitability over the past two years, the exchanges first-quarter earnings were down 21% from a year earlier, to $21.3 million.