CBOE: Unique trading franchise
With its SPX and VIX indices, this company has a strong position in financial trading products.
We reiterate our "strong buy" recommendation on CBOE Holdings (CBOE); the company has a unique franchise and is poised for growth.
We support a premium valuation for CBOE mostly for the company's proprietary position with its the S&P 500 Index (SPX) complex and the CBOE Volatility Index (VIX) trading products complex, which is rapidly gaining in popularity with a broader set of new customers.
The SPX and VIX index options were 90% or more of the company's total index options volumes in 2012. Both key proprietary products remain the dominant trading products for CBOE.
The index options from S&P Dow Jones Indices are through exclusive multi-year licensing agreements to list options based on the S&P 500, S&P 100 and DJIA.
On March 8, CBOE and S&P Dow Jones Indices reached an agreement whereby CBOE has exclusive trading rights to trade and to create new options on the S&P 500 and the S&P 100 and other derivative indexes through 2032.
CBOE has a working relationship with S&P Dow Jones Indices on ways to develop new indices for the SPX and VIX product family. (S&P Dow Jones Indices operates independently of S&P Capital IQ Equity Research.)
Management is exploring the development of U.S. Treasury trading products tied to VIX. We believe CBOE's goal to enhance shareholder value through product innovation and globalization will spur attractive organic growth, which continues to outstrip that of the peer group, which consists of larger companies.
Right now, 15% to 20% of average daily volumes in index options and futures come from non-U.S. trading sources. The introduction of 24 hour trading 5 days a week will enable non-U.S. institutions to participate in CBOE's key trading products.
With the opening of the London trading hub earlier this year, we believe this is a game changer that will spur future growth, as it enables buy-side institutions and other trading firms to take advantage of VIX futures trading.
Our investment thesis for CBOE is as a growth story with an attractive franchise that is poised for faster secular growth from proprietary index options and futures products. Investment risks are tied to execution with new technology platforms, market conditions and trading volume activity.
We think CBOE's exclusivity with major market index options and futures contracts supports a premium valuation for the shares along with its potential appeal as an attractive asset to larger market exchange operators.
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