Published December 12, 2012
William Brodsky, who transformed CBOE Holdings Inc from a member-owned exchange into a for-profit company best known as the home of Wall Street's favorite fear index, has unexpectedly announced he will step down as chief executive in May.
Brodsky, 68, will be succeeded by President and Chief Operating Officer Edward Tilly, 49, CBOE said on Wednesday. Brodsky, who has run the operator of the oldest and largest U.S. options exchange since 1997, is expected to become executive chairman.
The change comes at a challenging time for CBOE, as competition for options trading is exploding while volumes have declined. CBOE is also currently under SEC investigation for possible lapses in its self-regulation duties.
Still, CBOE shares have gained 16 percent so far this year, outpacing rivals such as the CME Group Inc, which gained 8 percent, and NYSE Euronext, which has lost 10 percent. CBOE shares closed up 19 cents, or 0.6 percent, at $30.10 on Wednesday on the Nasdaq Stock Market.
"Bill Brodsky was a particularly visible, and we think influential, leader who leaves big shoes to fill," said Macquarie Securities analyst Ed Ditmire.
Brodsky, famous for logging 15-hour days when on the road, carved out a dominant place for CBOE by relentlessly defending from would-be imitators its exclusive and lucrative options on benchmarks such as the Standard & Poor's 500 Index, as well as the CBOE Volatility Index - the well-known gauge of investor anxiety known as the VIX - and its products.
CHALLENGES FOR TILLY
Incoming CEO Tilly will have to continue to innovate with new products, reach more customers and improve technology to grow market share, analysts said.
And some investors might still be disappointed that Brodsky, who ran the Chicago Mercantile Exchange before joining CBOE, never put together a deal to create a single Chicago market behemoth. The financial crisis of 2007-2009 put an end to what had been a wave of exchange mergers and Brodsky turned his attention to building the market from within.
Tilly, as chairman of the old member-owned company, was known to attend CBOE-sponsored breakfasts in a trading jacket, filling up his plate with hearty helpings of bacon and eggs and carrying on conversations in the hoarse voice of a longtime floor trader.
In recent years, he has exchanged his trading jacket for a suit and tie and now usually indulges in the kind of breakfast Brodsky favors, including cereal and fruit.
Tilly has been a boon for the exchange, said former CBOE board member William Power.
"He has an uncanny ability to see the problems of the large customer before they do and deal with them ahead of the competition," Power said.
Despite the change, Brodsky will likely continue to wield significant power, said Thomas Caldwell, chairman of Toronto-based Caldwell Securities and a longtime Brodsky booster.
"He's not actually out the door and down the street. He'll still be there and will be a guiding influence," said Caldwell, who manages more than 1.5 million CBOE shares. "CBOE is still the most profitable of the options exchanges. Every other options exchange is a wannabe."
But there have been missteps as well, including the ongoing SEC investigation. Brodsky shuffled the firm's compliance team earlier this year to strengthen its oversight powers. CBOE declined to comment on the SEC investigation.
CBOE is also under pressure from declining U.S. option trading, down 13 percent through November of this year from the year-earlier period, according to OCC data.
In his new role, Brodsky's annual salary will drop from $1 million to $600,000, but he will be entitled to a $1.5 million target bonus and a $2.5 million restricted stock award, a regulatory filing showed.
Brodsky's resignation comes shortly after Mary Schapiro announced she was stepping down as Securities and Exchange Chairman, a position for which Brodsky has from time to time been mentioned.
In a conference call, Brodsky said he has been focused on the transition and plans to stay at CBOE for at least another year, with no plans beyond that.
Brodsky said his decision to step down was "the right move at the right time for me personally and for CBOE."
Getting through the 2010 IPO was important for the CBOE, Brodsky added and, once that was accomplished, he owed it to the company to begin activating a succession plan.
Should Brodsky take a full-time government job before the end of the year, the employment agreement states, he will get a pro-rated portion of the bonus and stock award.
"It certainly makes sense that he could be considered for the SEC position," said Herb Kurlan, managing member of Pykrete Capital Group, a financial services firm in San Francisco. "He is on top of the issues and knows what the industry wants."
Wednesday's announcement was unexpected because Brodsky's contract ran through the end of 2013. Asked about his future as CBOE chief in a Reuters interview in October, he said his father had been on Wall Street for 60 years and he had done 45 and was not quitting yet.
During Brodsky's tenure, what was once a cottage industry of four brick-and-mortar exchanges exploded into a hyper-competitive part of securities trading, with no less than 11 exchanges now vying for a cut of 16 million or so contracts that change hands on an average day.
The newest U.S. options venue, Miami International Securities Exchange, went live on Dec. 7.
To keep CBOE competitive, Brodsky moved most of the exchange's trading to the computer screen, built an all-electronic trading venue and transformed the company from a member-owned club to publicly traded company over a period of five years, culminating in an initial public offering in June 2010.
Brodsky's brutal schedule surely gives age no quarter. When traveling, which is often, he can start at 6:30 in the morning and go until 10 at night, former CBOE board member Power said.
"When I joined the board of directors in 2003, we had $20 million in revenues and we hardly had any profits to speak of," Power said. "Today in 2012, we have a half a billion dollars in revenues and the transition is completed from the non-profit to a profit-making company."