November 1, 2019 / 11:58 AM / 8 months ago

UPDATE 2-Cboe takes aim at retail stock orders as profits rise

(Adds details on new retail order type and exchange competition, executive quote from conference call)

By John McCrank and Abhishek Manikandan

Nov 1 (Reuters) - Cboe Global Markets Inc on Friday launched a service aimed at wooing retail stock orders, as the exchange operator posted better-than-expected third-quarter results, boosted by higher trading volume in its proprietary products.

Cboe owns the rights to products such as S&P 500 index options and derivatives linked to the VIX volatility index, Wall Street's so-called "fear gauge." They helped drive Cboe's options trading volumes up about 15% in the quarter from a year earlier, and futures trading volumes up nearly 17%.

Cboe also runs four of the 13 U.S. stock exchanges currently operating. In that hyper-competitive environment, the Chicago-based company's U.S. equities market share slipped to 17.2% from 17.5% a year earlier, though it was up from 15.7% a quarter ago.

"We were very clear that we were not happy with the market share where we were," Cboe Chief Financial Officer Brian Schell said on a call with analysts, referring to prior quarters.

To attract more volume, Cboe lowered some of its pricing, taking a longer-term view that higher volumes increase the value of its market data and other services, he said.

Competition is also heating up. A new yet-to-open exchange gained regulatory approval in May, and the application for another, backed by a consortium of big financial institutions seeking to lower trading costs, was published on Thursday.

To attract more volume, Cboe on Friday launched an order type on one of its exchanges that gives retail orders priority over other orders, which Cboe said will improve execution times.

Retail orders make up around 20% of U.S. stock orders, but most are bought by so-called wholesale brokers, such as Virtu Financial Inc and Citadel Securities, which pay slightly more than the best market price and try to profit off the bid-offer spread.

Exchanges vie for the remaining orders.

Many retail brokers, such as TD Ameritrade, E*Trade Financial Corp, and Charles Schwab Corp, recently eliminated trading fees in a fight for customers.

That increases the importance of getting quality executions for those customers, which Cboe hopes to cash in on.

Cboe's quarterly net income rose to $105.5 million, or 94 cents per share, from $85 million, or 76 cents per share, a year earlier.

Stripping out one-time items, Cboe earned $1.29 per share, 14 cents above analysts expectations, according to IBES data from Refinitiv.

Revenue rose 8.7% to $294 million. (Reporting by John McCrank in New York and Abhishek Manikandan in Bengaluru; Editing by Subhranshu Sahu and Richard Chang)

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