Dear CBOE Member:
We advised you recently that the International Securities Exchange (ISE) filed a lawsuit in New York federal court against Standard and Poorâs and Dow Jones. The lawsuit seeks a declaratory judgment that would authorize ISE to list and provide a market for the trading of options on the S&P 500 (SPX) Index and the Dow Jones Industrial Average (DJX) without a license from the owners of those indexes -- S&P and Dow Jones.
While we are not able to publicly discuss the legal merits of the suit at this time, you can be assured that we are working with Dow and S&P in preparing a vigorous, well-grounded legal defense. We can, however, take this opportunity to reiterate our philosophy regarding proprietary products and exclusive licensing and, ultimately, product innovation, which to us is at the heart of this case.
Innovation isnât just a buzzword at CBOE. CBOE invented index options and CBOE has been responsible for virtually every index option enhancement that followed. These developments come at a price far beyond the cost of the licenses themselves. CBOE has committed millions of dollars and a tremendous number of man-hours in support of new product development and implementation. Each new product -- successful or not -- requires significant investments in research and development, in new systems and regulatory procedures, and in customer education.
Significant risk accompanies the high cost of developing and launching new-product innovations. For every success story, there are untold products that trade only thinly or not at all. When we make the decision to launch a product, we assume full responsibility for it. If a new product fails to trade, we do not expect other exchanges to help defray its cost. If it succeeds, we should not expect them to share in its profits.
CBOEâs ongoing willingness to assume the risk of introducing new products far outpaces that of any other options exchange. Some of our competitors would like to share the fruits of our labor without having to shoulder any cost or risk. No matter how this strategy is cloaked, it is free riding and is ultimately anti-competitive. The desire on the part of a competitor to have a stake only in our more popular, market-tested winners is equally understandable, but the practice of cherry picking, like free riding, is ultimately a disincentive to those who would truly innovate.
It may be more cost effective to pursue new products through litigation than through research and development, but we donât subscribe to the argument that these lawsuits are of benefit to investors. Product innovation benefits investors. Lawsuits add to the cost of product development and ultimately create disincentives to innovate. CBOE is rewarded only when its innovations are found to be of use to investors -- and it absorbs the cost of developing those that are not.
Every exchange is free to compete through innovation. There is no paucity of good ideas. In the past two years, while some of our competitors have focused their product development efforts on lobbying and litigation, CBOE has introduced VIX Options, VIX Futures, and the S&P 500 BuyWrite Index. These, by the way, are neither small concepts, nor mere product enhancements, but groundbreaking product innovations of obvious benefit to the legions of investors already using them.
CBOE will continue to innovate. No customer or industry ultimately benefits when its innovators are hamstrung by legal defense costs or by being forced to unfairly share profits without sharing risks. Product innovation has never been more crucial to the options industry than it is today, when product lines are blurred and customers and users are increasingly sophisticated. CBOE will continue to advance the frontier of the options product in an increasing global marketplace. We intend to make profits and to serve investors through product innovations yet to come, and we will continue to vigorously defend our right to so do.
Sincerely,
Bill Brodsky Ed Tilly John Smollen
We advised you recently that the International Securities Exchange (ISE) filed a lawsuit in New York federal court against Standard and Poorâs and Dow Jones. The lawsuit seeks a declaratory judgment that would authorize ISE to list and provide a market for the trading of options on the S&P 500 (SPX) Index and the Dow Jones Industrial Average (DJX) without a license from the owners of those indexes -- S&P and Dow Jones.
While we are not able to publicly discuss the legal merits of the suit at this time, you can be assured that we are working with Dow and S&P in preparing a vigorous, well-grounded legal defense. We can, however, take this opportunity to reiterate our philosophy regarding proprietary products and exclusive licensing and, ultimately, product innovation, which to us is at the heart of this case.
Innovation isnât just a buzzword at CBOE. CBOE invented index options and CBOE has been responsible for virtually every index option enhancement that followed. These developments come at a price far beyond the cost of the licenses themselves. CBOE has committed millions of dollars and a tremendous number of man-hours in support of new product development and implementation. Each new product -- successful or not -- requires significant investments in research and development, in new systems and regulatory procedures, and in customer education.
Significant risk accompanies the high cost of developing and launching new-product innovations. For every success story, there are untold products that trade only thinly or not at all. When we make the decision to launch a product, we assume full responsibility for it. If a new product fails to trade, we do not expect other exchanges to help defray its cost. If it succeeds, we should not expect them to share in its profits.
CBOEâs ongoing willingness to assume the risk of introducing new products far outpaces that of any other options exchange. Some of our competitors would like to share the fruits of our labor without having to shoulder any cost or risk. No matter how this strategy is cloaked, it is free riding and is ultimately anti-competitive. The desire on the part of a competitor to have a stake only in our more popular, market-tested winners is equally understandable, but the practice of cherry picking, like free riding, is ultimately a disincentive to those who would truly innovate.
It may be more cost effective to pursue new products through litigation than through research and development, but we donât subscribe to the argument that these lawsuits are of benefit to investors. Product innovation benefits investors. Lawsuits add to the cost of product development and ultimately create disincentives to innovate. CBOE is rewarded only when its innovations are found to be of use to investors -- and it absorbs the cost of developing those that are not.
Every exchange is free to compete through innovation. There is no paucity of good ideas. In the past two years, while some of our competitors have focused their product development efforts on lobbying and litigation, CBOE has introduced VIX Options, VIX Futures, and the S&P 500 BuyWrite Index. These, by the way, are neither small concepts, nor mere product enhancements, but groundbreaking product innovations of obvious benefit to the legions of investors already using them.
CBOE will continue to innovate. No customer or industry ultimately benefits when its innovators are hamstrung by legal defense costs or by being forced to unfairly share profits without sharing risks. Product innovation has never been more crucial to the options industry than it is today, when product lines are blurred and customers and users are increasingly sophisticated. CBOE will continue to advance the frontier of the options product in an increasing global marketplace. We intend to make profits and to serve investors through product innovations yet to come, and we will continue to vigorously defend our right to so do.
Sincerely,
Bill Brodsky Ed Tilly John Smollen
