CBOE Holdings Inc. (CBOE) disclosed its intention to list options derivatives for Alibaba Group Holding Ltd., following the latter’s initial public offering (IPO) on Sep 19 at NYSE, under the symbol BABA. The increased volatility that Alibaba stock is likely to experience attracts the attention of this options exchange.
CBOE Holdings plans to list Alibaba options within a fortnight of the IPO, by Sep 29. The U.S. options exchange would list this eCommerce behemoth’s option contracts in its both primary exchange – Chicago Board Options Exchange Inc., or CBOE, as well as in its all-electronic options exchange – C2 Options Exchange Inc., or C2. While the CBOE is about four decades old, C2 has been operational since 2010.
Opportunities Galore
CBOE and C2 together hold a strong market position, representing 29% of stock and exchange options trading in the U.S. so far in 2014, according to OCC or Options Clearing Corporation. Additionally, CBOE Holdings’ compelling economic market model and core competencies have kept it higher on the client’s list of investing forums. The exchange’s total options contracts and average daily volumes from CBOE and C2 grew 10% year over year until Aug 2014, despite weak performance in first-half 2014.
The exchange offers flexible and extended trading along with updated technical competence, while having a minimal cost structure. All these help it to generate higher margins. These positives further aid CBOE Holdings to retain a sizable market position amidst industry bellwethers like CME Group Inc. (CME) and Intercontinental Exchange Inc. (ICE).
In order to stay ahead of competition, CBOE Holdings proactively focuses to avoid seasonality issues, reduction in demand and any significant adverse market volatility. For this, the company attempts to constantly add to its derivative contracts’ list of rapidly growing internet and tech companies, which are stimulated by increased volatility and aid portfolio hedging, thus gaining consistent demand from market investors.
Such firms are also the revenue drivers for options exchanges. In this respect, Alibaba appears promising. It will also encourage stock price volatility for peers Amazon.com Inc. (AMZN) and eBay Inc. (EBAY).
Challenges Ahead
The listing of Alibaba options are subject to sanctions of the contract specifications from the OCC, which will likely come before the stock trading commences.
Meanwhile, CBOE Holdings will likely face competition from other options exchanges as well, which are also likely to list Alibaba options upon OCC approval. International Securities Exchange Holdings Inc. (ISE Holdings) is expected to be one such strong contender. ISE Holdings is a leading options exchange, principally owned by Frankfurt-based Deutsche Börse AG, that benefits from the size and scale of the transatlantic exchange. BATS options exchange of BATS Global Markets Inc. is also anticipated to list Alibaba options.
Bottom Line
Alibaba’s IPO target price, currently in the range of $66–68 and increased from $60–66 range, reflects the heightened demand for the stock. The new price, which can be raised further, is projected to earn over $24 billion. This will make Alibaba the largest IPO ever so far, leaving behind Facebook Inc. (FB) and Agricultural Bank of China that earned about $16 billion in 2012 and $22 billion in 2010, respectively.
Alibaba’s post-IPO story appears interesting given its robust global competitive edge and sales flow that is greater than the combined offerings of Amazon and eBay; also reflected in growth of about 46% in revenues, 200% in earnings and $1.71 billion of free cash flow in the recent reported quarter. The company is expected to consistently generate top- and bottom line in the strong double-digits over the next few years, driven by its large scale of operations and smart business model.
Meanwhile, although competitive and operational risks cannot be overlooked for exchanges given the mixed returns witnessed from IPOs so far this year, we believe investors should gear up for increased volatility in the sector owing to Alibaba and its peers. Alibaba is most likely to generate business for CBOE Holdings and other exchanges banking on the company’s immense future growth prospects and a competitive edge.
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