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Last week's initial public offering of CBOE Holdings Inc. , parent of the Chicago Board Options Exchange, may have investors looking at stocks for the other North American exchanges, where they have a number of, well, options.

Yet while the parent companies of the New York Stock Exchange, the Nasdaq and the Toronto Stock Exchange offer up high margins and recognizable names, the biggest and most profitable exchange companies specialize not in big-name stocks, but in futures, derivatives and other financial instruments.

A decade ago, the U.S. exchanges were privately held membership organizations; that changed in 2002 with the initial public offering of the Chicago Mercantile Exchange, now known as CME Group.

Today, CME Group is the segment leader by market capitalization. At almost $20-billion (U.S.), it's nearly 50 per cent more valuable than NYSE Euronext Inc., Nasdaq OMX Group Inc. and TMX Group Inc. combined.

CME Group, thanks in part to a series of deals to buy smaller exchanges, offers futures trading for interest rates, equity indexes, foreign exchange, energy and commodities. And while the bulk of its business comes from the United States, where it has New York and Chicago trading floors, it's expanding internationally.

Investors find that reach appealing, but it's the end result they love: In the past 12 months, CME generated $1.87-billion in EBITDA, or earnings before interest, taxes, depreciation and amortization, on revenue of just $2.66-billion, according to data from Standard & Poor's Capital IQ.

Another less-known futures operation, IntercontinentalExchange Inc., boasts similar margins, resulting in a $8.8-billion market cap, higher than NYSE Euronext's $7.6-billion. IntercontinentalExchange produced $660-million in EBITDA on just over $1-billion in revenue in the past 12 months, according to Capital IQ.

That type of performance is why futures exchanges typically trade at a 20 per cent or more premium to options and equity exchanges, estimates analyst Rob Rutschow of Credit Agricole Securities, who initiated coverage of CBOE Holdings this week with an "outperform," a notch below the company's top "buy" rating.

CBOE is currently the largest American options exchange and a beneficiary of an explosion in options activity over both the short and long terms. CBOE tells investors in its prospectus that Options Clearing Corp. estimates that 3.6 billion options contracts were traded on U.S. exchanges in 2009, reflecting a 25-per-cent compound annual growth rate over the past five years and a 25.2-per-cent rate since CBOE's inception in 1973.

Mr. Rutschow believes CBOE has a competitive advantage due to exclusive licences for options on indexes from both Standard & Poor's and Dow Jones. In addition, CBOE created the S&P Volatility Index, or VIX, which is becoming widely embraced as a measure of market volatility.

Mr. Rutschow also believes CBOE can boost revenue from new fees for trading permits, and its future earnings-per-share growth will be significantly driven by a share buyback program (although the sellers will be the CBOE seat holders, who presumably know the business best and will be divesting, rather than building, their holdings).

Other risks include Securities and Exchange Commission proposals to cap per-contract fees, and the fact that CBOE has already done significant cost-cutting pre-IPO, leaving further reductions in question, Mr. Rutschow says.

Another downside is that CBOE continues to face pricing pressure for its plain-vanilla options trading, a problem that also bedevils the legacy stock exchanges.

The Toronto Stock Exchange may feel the greatest pressure as it tries to fend off a challenge from the upstart Alpha Group, which now often executes more than a quarter of the trades in TSX-listed companies. Alpha Group, co-owned by a number of Canadian investment dealers, recently made another price cut, which "reinforces the trend of pricing pressure within the industry," said analyst Geoffrey Kwan of RBC Dominion Securities.

Mr. Kwan has an "underperform" rating on TMX Group with "above-average risk." While he believes TMX Group will still increase its top line because of the mix of products it trades on its exchanges, he forecasts that equity trading revenue to decline 9 per cent in 2010 and 13 per cent in 2011 because of market share losses and lower revenue per share traded.

Analyst Daniel T. Fannon of Jefferies & Co. has a "hold" on NYSE Euronext despite the optimistic title of his most recent report, "Much More Than A Stock Exchange." Cash trading and listings make up 56 per cent of the company's revenue, while derivative-trading revenue contributes 29 per cent and the company's information-technology services produces 15 per cent.

It is the latter two categories, Mr. Fannon reports, where NYSE Euronext sees its top-line opportunities. He notes the company recently hired Dominique Cerutti, a former senior manager at IBM as president, deputy CEO, and head of its information services and technology solutions business.

Mr. Cerutti "was in a senior management role at IBM while IBM was going through a strategic transformation in the mid '90s from a declining computer hardware company (low margins) to the one of the world's leading software and information technology services company (higher margins)," Mr. Fannon wrote in a March report after the company's investor day.

"The continued commoditization of the cash equities business has forced NYX to reevaluate its core business and attempt a strategic shift towards areas it believes it has a competitive advantage in and can create barriers to entry around," he said. "In alignment with this view, the theme … was one of transformation - the transformation of a legacy stock exchange into a global full services provider of trading execution and technology solutions."

Crain's Chicago Business reported last fall that CBOE was in "informal" talks to be acquired by CME.

Jostling for market share

Company

Market capitalization

Revenue

(last 12 months)

EBITDA

(last 12 months)

CBOE Holdings

3,280.36

429.1

205.3

CME Group

19,973.96

2,658.9

1,869.3

Intercontinental

8,829.71

1,044.9

660.1

Nasdaq OMX

3,887.92

3,278.0

705.0

NYSE Euronext

7,579.44

4,207.0

1,129.0

TMX Group

2,087.17

543.5

311.1

All values in millions of U.S. dollars. Values converted at today's spot rate. Source: Capital IQ



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