Cboe Global Markets Annual Report 2002

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FY2002 Annual Report · Cboe Global Markets

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state of the exchange

chicago board options exchange annual report 2002

cv2

fy 2002: a year of
challenges and
strategic initiatives

Letter from the Office of the Chairman

during the past year, the u.s. equity market

struggled to find a bottom amidst the ongoing

threat of terrorism and war. the highly publicized

reports of corporate misconduct and accounting

abuses further undermined investor confidence.

the chicago board options exchange® (cboe®), the

world leader among options exchanges, was buffeted

by the effects of the market’s tumult as well as by

increasing competitive pressures.

Competitive Environment
Against the backdrop of a difficult
macroeconomic environment, CBOE and
its members faced intense competition
from other exchanges. Increased elec-
tronic competition had a profound effect
on CBOE’s business as well as on the
business of other floor-based exchanges.
CBOE members’ profitability suffered and
many smaller Designated Primary Market
Makers (DPMs) merged or consolidated
with larger firms.

The Exchange continued to lead the
market in options volume in FY 2002,
with overall market share of 37% of all
options contracts traded. Exchange
volume in FY 2002, however, was off 14%
from the record-breaking levels set in
the previous fiscal year. CBOE continued
to lead the industry in equity options
trading, although market share in equity

options was down 5.5 percentage points
from FY 2001 to 33% in FY 2002.
Volume in index options was a bright
spot as market share climbed from 54%
in FY 2001 to 56% in FY 2002 when
investors sought the broad protection
provided by index options as market
volatility increased.

Throughout the year, CBOE’s member-
ship, Board of Directors and staff worked
to address losses in market share and
member profitability, and to productively
chart the future course for the Exchange.
In light of the changing competitive
landscape, our first priority was the
development of a hybrid trading model,
which will merge the best features of
both screen- and floor-based trading.
The development of this unique, “best
of both worlds” trading model is well
under way.

total options market share
fiscal year 2002

index options market share
fiscal year 2002

equity options market share
fiscal year 2002

phlx 11.7%

pcx 11.8%

ise 15.0%

amex 24.5%

cboe
37.0%

phlx 6.2%
pcx 6.4%
ise 6.7%

amex 24.7%

cboe
56.0%

phlx 12.9%

pcx 13.0%

ise 16.9%

amex 24.5%

cboe
32.7%

New Trading Model
CBOE’s trading floor has the greatest
concentration of market-making expertise
and the deepest pool of liquidity of any
options exchange. The CBOE hybrid
trading model will preserve these floor-
based advantages while enhancing
CBOE’s ability to capture screen-based
business. The hybrid model will offer
customers the best elements of both
trading environments—the speed and
functionality of screen-based systems
combined with the market depth, ability
to execute complex strategies, and
opportunity for price improvement found
on the trading floor.

More than two dozen enhancements were
built and effectively integrated into the
evolving hybrid model during FY 2002.
Two of the most important elements of
the hybrid were rolled out over the past
six months.

In May 2002, CBOE introduced “Dynamic
Quotes with Size.” This new technology
allows investors to see, in real time, the
number of contracts that are available to
be traded at a given price. The “dynamic
size” feature is continually updated
throughout the trading day, providing
investors with an understanding of the
liquidity available in every options series.

In July 2002, CBOE unveiled a second
major component of the hybrid model—

the Large Order Utility (LOU). LOU offers
“point and click” convenience, instanta-
neous reports on any order up to the
size displayed, and exposure to the trading
floor’s centralized pool of liquidity for
price improvement. This combination of
instantaneous reporting with continued
exposure to the market for possible price
improvement is not available through any
other options marketplace.

CBOE’s goal in developing the hybrid
trading model is to offer customers
convenience, liquidity and price improve-
ment opportunity that is unparalleled in
the options industry.

CBOEdirect
The cornerstone of the CBOE hybrid
trading model is CBOEdirect,® CBOE’s
screen-based trading system, launched
on October 26, 2001. A milestone tech-
nological achievement for the Exchange,
CBOEdirect replicates CBOE’s trading
floor on a screen. CBOEdirect currently
supports the trading of some of CBOE’s
most popular index products during
extended trading hours (7 a.m.– 8:15 a.m.).

CBOEdirect was developed as a hedge
against screen-based competition.
Although designed to be a stand-alone
system, key components of CBOEdirect
have been used as the foundation
of the hybrid.

competitive environment

increased electronic competition had a profound

effect on cboe’s business as well as on the business

of other floor-based exchanges.

new trading model

cboe’s goal in developing the hybrid trading

model is to offer customers convenience,

liquidity and price improvement opportunity

that is unparalleled in the options industry.

total volume
in millions, by fiscal year

average daily volume
in millions, by fiscal year

open interest
in millions, by fiscal year

350

300

250

200

150

100

1998

1999

2000 2001

2002

1.4

1.2

1.0

1998

1999

2000 2001

2002

1998

1999

2000 2001

2002

CBOE has a long legacy of technological
innovation. With the introduction of
CBOEdirect, the Exchange has once
again redefined the state of the art in
trading technology. In January 2002,
CBOEdirect was chosen as the trade
engine for OneChicago, an all-electronic
exchange trading single stock futures
and futures on narrow-based indexes.
Additionally, in September 2002, the
Chicago Board of Trade (CBOT®)
purchased a license to use CBOEdirect
software to support and enhance its
trading floor.

New Products
To meet the needs of a growing and
diverse customer base, CBOE added a
wide range of products in FY 2002.
Most notably, options on DIAMONDS®
(DIA) began trading at CBOE on May 20,
2002 and quickly became one of CBOE’s
top five most actively traded index prod-
ucts. Volume in options on DIAMONDS
continues to post impressive gains,
averaging more than 33,000 contracts
traded per day. DIAMONDS are shares in
an exchange-traded fund designed to
track the performance of the Dow Jones
Industrial AverageSM (DJIA®).

•

Additional new products listed include:
S&P 100® Index Options with European-
style exercise (XEO®) launched on July 23,
2001. CBOE developed this product in
response to customer requests for an

S&P 100 Index option that does not carry
the possibility of early assignment.

•

Shares of the Nasdaq-100 Index Tracking
StockSM (QQQ). This exchange-traded
fund began trading at CBOE on August 1,
2001, following the successful introduc-
tion of QQQ options on February 27, 2001.
The QQQ shares are among the most
actively traded contracts in the world.

Three new Morgan Stanley sector index
options launched on October 22, 2001—
Morgan Stanley Biotech Index (MVB),
Morgan Stanley Oil Services Index (MGO),
and Morgan Stanley Retail Index (MVR).

Standard & Poor’s® Depository Receipts
(SPDRs®) became available at CBOE on
November 23, 2001. This exchange-traded
fund (CBOE ticker symbol SPY) repre-
sents units of beneficial interest in a unit
investment trust that holds the component
stocks of the S&P 500® Index.

A critical development in new products
was realized on May 14, 2001 with the
formation of OneChicago. CBOE, the
Chicago Mercantile Exchange Inc. and
the Chicago Board of Trade formed this
joint venture to trade single stock futures
and futures on narrow-based indexes.
CBOE members are members of
OneChicago, which is expected to begin
trading in the fourth quarter, 2002.

onechicago at a glance

cboe new listings
in fy 2002

cboe total product
listings

85 single stock
futures to be listed

15 narrow-based index
futures to be listed

20+ Lead Market
Makers

7,000+ members

500+ member firms

399 equity options

1,487 equity options

4 index options

32 index options

2 exchange-traded
funds

18 exchange-traded
funds

78 LEAPS®

424 LEAPS®

Index Options
The uncertainty and volatility that charac-
terized much of the stock market in
FY 2002 contributed to a sharp increase
in index options trading at CBOE. Index
options, which allow investors to make
investment decisions based on market
segments or on the market as a whole,
offer an efficient means of portfolio
protection. CBOE pioneered the listing
of index options in 1983.

Exchange-traded funds (ETFs) are
index-linked baskets of stocks that trade
on an exchange at a market price close
to the underlying value of the securities in
its portfolio. ETFs can be traded like stocks,
yet mimic many of the characteristics
of indexes. As such, they are also used
to manage risk. For calendar year 2002,
total ETF volume through September was
up 32% when compared to September
2001, due in part to strong volume in the
QQQs and SPDRs.

In FY 2002, total index options volume
increased in ten of the twelve months
when compared to the previous year. For
calendar year 2002, total index volume
at CBOE was up 23% through September
when compared to September 2001,
including: options on the Dow Jones
Industrial AverageSM (DJX), up 37%; S&P
100® Index options (OEX®), up 25%; S&P
500® Index options (SPXSM), up 19%; and
options on the Nasdaq-100 Index Tracking

StockSM (QQQ), up 17%. In July 2002,
new records were established for
monthly volume in DJX (1,485,582
contracts traded), SPX (3,859,734
contracts traded) and QQQ options
(2,450,147 contracts traded).

CBOE renewed its licensing agreement
with Dow Jones & Company, Inc. to
trade Options on the DowSM (DJX) and
other Dow Jones Indexes. Exclusively
traded at CBOE since 1997, DJX
options are one of the Exchange’s most
actively traded index products. CBOE
now lists seven Dow Jones products.

CBOE initiated a number of efforts in
FY 2002 to promote its index products,
including marketing programs aimed at
institutional investors, new micro-websites
at www.cboe.com dedicated to index
products, new Index WorkbenchSM soft-
ware posted on the same website, and
distribution of CD-ROM versions of the
Index Workbench to more than 35,000
institutional investors.

Another significant achievement was the
Exchange’s development of the CBOE
BuyWrite Monthly IndexSM (BXM). The BXM
is a benchmark measure of the popular
buy-write strategy. CBOE believes that
the introduction of the BXM will lead to
more long-term customer interest in, and
use of, CBOE index options.

a critical development in new products was

realized on may 14, 2001 with the formation of

onechicago. cboe, the chicago mercantile

exchange inc. and the chicago board of trade

formed this joint venture to trade single stock

futures and futures on narrow-based indexes.

new products

indexes

in fy 2002, total index options volume increased

in ten of the twelve months when compared to

the previous year.

total index options volume
in millions, by fiscal year

dow jones industrial average
(djx) volume
in millions, by fiscal year

s&p 500 (spx) volume
in millions, by fiscal year

8.0

7.0

6.0

5.0

4.0

3.0

2.0

jul

a u g

o ct
sep
fy 2001

n o v

dec

feb
ja n
fy 2002

m ar

apr

m ay

ju n

1.2

1.0

.80

.60

.40

.20

0
jul

a u g

o ct
sep
fy 2001

n o v

dec

feb
ja n
fy 2002

m ar

apr

m ay

ju n

3.0

2.5

2.0

1.5

1.0

jul

a u g

sep
o ct
fy 2001

n o v

dec

feb
ja n
fy 2002

m ar

apr

m ay

ju n

During this past year’s turbulent markets,
the widely quoted CBOE Volatility Index®
(VIX®) achieved even greater recognition
as the benchmark measure of U.S. mar-
ket volatility. The VIX was created and
launched by CBOE in 1993 as a meas-
ure of the implied volatility of S&P 100®
Index options.

Education
Throughout bull and bear markets, CBOE
has remained steadfast in its commitment
to educational outreach programs.

The Options Institute, the educational
arm of the Exchange, holds classes to
educate individual investors, institutional
investors, brokers, traders, trading floor
and firm employees, and financial advisors.
In FY 2002, The Options Institute intro-
duced “Trade Like the Pros” seminars,
which are available to the public and
provide a special “hands-on” opportunity
to learn the basics of options trading.

The Options Institute also expanded its
Online Learning Center at www.cboe.com
with the addition of a new interactive
learning section, titled “Advanced
Strategies.” The Options Institute Online
Learning Center offers a wide variety
of options tutorials for both novice and
sophisticated investors, all free of charge.

CBOE’s website, www.cboe.com, is inter-
nationally recognized as one of the most

valuable one-stop sources of options
research, data and education available.
In July 2002, CBOE debuted two new
micro-websites in Chinese and Spanish
to accommodate the growing number
of international investors who are incor-
porating options into their investment
portfolios. For the third straight year,
CBOE’s website received a “Best of the
Web” award from Forbes Magazine.

In January 2002, CBOE, the Chicago
Board of Trade and Chicago Mercantile
Exchange Inc. hosted the 18th annual
Risk Management Conference in
St. Petersburg, Florida. The Risk Manage-
ment Conference is the main conference
event for the options and futures industries,
and provides an educational forum where
end users of derivatives discuss the
strategies, tools and systems they use to
manage risk and enhance yields.

Advocacy
CBOE remained the leading advocate for
the options industry in Washington, D.C.
during FY 2002. CBOE worked with the
Securities and Exchange Commission
(SEC) and the Commodity Futures Trading
Commission to ensure that the margin
rules and tax treatment governing single
stock futures were fair, so that competi-
tion with other derivative products,
including options, takes place on a level
playing field.

options institute

www.cboe.com

543 classes taught
around the world in
FY 2002

16,643 investors
attended classes in
FY 2002

217,133,363 page
views of www.cboe.com
in FY 2002

43% increase over
FY 2001

54,658 registrants for
“My CBOE,” the person-
alized web engine of
www.cboe.com

124 countries with users
regularly accessing
www.cboe.com

Additionally, CBOE played a significant
part in passage of the Investor and Capital
Markets Fee Relief Act. This legislation
repealed the Section 31 fees applicable
to options on most broad-based indexes.
Index options compete directly with
futures and futures options based on
stock indexes, which were not subject to
comparable transaction fees. With the
passage of this legislation, most index
options are now exempt from these fees.

In recognition of CBOE’s role in
championing this legislation, CEO William
Brodsky was invited to the White House
for President Bush’s signing of the
Investor and Capital Markets Fee Relief
Act in January 2002.

Governance
CBOE members overwhelmingly
approved a plan to alter the composition
of the CBOE Board of Directors to
increase the role of public directors in
Exchange governance. The composition
of the Board will be modified so that
CBOE governance is equally balanced
between 11 industry (member) directors
and 11 non-industry (public) directors,
plus the Chairman. As a result of this
vote, CBOE was commended by the
SEC for “initiatives [which] evidence
the CBOE’s strong commitment to the
integrity of our marketplace and the
strength of the self-regulatory function.”

Moving Forward
As the Exchange moves forward, several
significant developments will occur
during FY 2003, providing valuable ben-
efits to the Exchange, its membership
and customers.

Most significantly, we look forward to the
completion of the hybrid trading model
early in 2003. The hybrid will merge the
best features of screen- and floor-based
trading to offer an ideal trading environ-
ment, unmatched in the options industry.

We would like to thank our dedicated
members, particularly those on the Equity
Floor Procedure Committee, who have
worked tirelessly to guide the development
of CBOE’s hybrid trading model. Additional
thanks to members of the Strategic
Planning Task Force for their important
work in forging CBOE’s response to
changes in the competitive landscape.

After current implementation plans are
realized, the hybrid will continue to evolve.
Its open-ended design will enable the
Exchange to integrate new technologies
and compete effectively in a dynamic
marketplace. Both the original construction
of CBOEdirect, and the modifications made
to it to support OneChicago, are demon-
strations of CBOE’s ability to continually
advance and adapt its trading technology
to address competitive challenges.

education

throughout bull and bear markets, cboe

has remained steadfast in its commitment

to educational outreach programs.

moving forward

the hybrid trading model will preserve floor-

based advantages while enhancing cboe’s ability

to capture screen-based business.

William J. Brodsky

Mark F. Duffy

Edward J. Joyce

The implementation of market linkage
represents another major technological
undertaking at CBOE. We anticipate the
first phase, linkage of orders eligible for
automatic execution, to be in place early
in 2003, and the second phase, for all
other orders, to be in place shortly there-
after. By providing electronic access
between markets, linkage will allow CBOE
to guarantee our customers the best
bid or offer available, with less risk to
our traders.

Single stock futures are expected to be
launched in the fourth quarter, 2002.
CBOEdirect will be the trade engine for

these new major products, which will be
traded at OneChicago.

Although this past year has been both
difficult and demanding, the future holds
tremendous promise for the options
industry. The Exchange and its member-
ship have never shied away from a
challenge. Critical steps have been taken
this year to expand our business and to
increase member profitability. With the
continued efforts of our dedicated
members, Board of Directors, and staff,
we move forward with enthusiasm and
determination to remain the leading
options exchange in the world.

William J. Brodsky
Chairman and CEO

Mark F. Duffy
Vice Chairman

Edward J. Joyce
President and COO

cboe financials fy 2002

financial summary

The Exchange experienced disappointing results
for the fiscal year ended June 30, 2002. In con-
trast to the two prior years when record trading
volume was achieved, CBOE volume in FY 2002
declined by 14% to 1.1 million contracts per day.
In addition, market share continued to decline in
the wake of increased competition.

CBOE recorded a net loss of $5.6 million in
FY 2002 compared to net income of $7.1 million
in FY 2001.

Total Exchange revenues declined by $9.0 million
or 6%, mainly due to lower transaction fee
revenue ($6.7 million) and less revenue from the
Options Price Reporting Authority (OPRA) due
to less market share and lower OPRA net income
($2.7 million).

Total expenses were $6.3 million higher than the
prior year, mainly due to an increase in non-cash
depreciation and amortization expense ($5.1
million) and severance costs related to staff down-
sizing ($4.3 million). Increased expenses were
also experienced in trading floor related systems
expenses ($2.2 million) and royalty fees related
to increased index trading volume ($1.6 million).

Contributing to the unfavorable results in
FY 2002 was CBOE’s share of OneChicago,
LLC (ONE) operating losses ($1.5 million).
CBOE contributed $4.4 million in capital to
ONE in FY 2002.

The Exchange invested $21.9 million in other
capital spending during FY 2002. Most of
these expenditures were for systems hardware
and software related to capacity increases,
single stock futures and various trading floor
technology enhancements.

During the year, $5.3 million was paid into an
escrow account, representing the third and final
installment payment of a September 2000
consolidated civil class action settlement. In
FY 2001 and FY 2002, a total of $16.0 million
was paid by CBOE into the escrow account
for our share of the settlement. Note 6 to the
consolidated financial statements summarizes
the status of the settlement.

Retained earnings decreased to $103.7 million
and total members’ equity at June 30, 2002 was
$124.6 million. At year’s end, the Exchange was
debt-free with working capital of $17.1 million.

consolidated statements of income and retained earnings

Chicago Board Options Exchange, Incorporated and Subsidiaries
For the Years Ended June 30, 2002 and 2001 (in thousands)
Revenues:
Transaction fees
Other member fees
Options Price Reporting Authority income
Regulatory fees
Interest
Equity in income of CSE
Other
Total Revenues

Expenses:
Employee costs
Severance expense
Outside services
Facilities costs
Communications
Data processing
Travel and promotional expenses
Depreciation and amortization
Royalty fees
Equity in loss of OneChicago
Other
Total Expenses

(Loss) Income Before Income Taxes

Provision (Benefit) for Income Taxes:
Current
Deferred
Total Provision for Income Taxes

Net (Loss) Income

Retained Earnings at Beginning of Year

Retained Earnings at End of Year

consolidated balance sheets

2002

89,436
24,641
18,884
11,231
459
141
4,031
148,823

63,920
4,499
13,458
4,351
727
17,492
5,428
29,709
8,989
1,483
2,195
152,251

(3,428)

(3,102)
5,294
2,192

(5,620)

2001

96,165
24,613
21,539
10,835
1,348
717
2,597
157,814

67,255
157
17,451
3,993
879
15,264
6,452
24,634
7,397
0
2,421
145,903

11,911

(2,943)
7,718
4,775

7,136

109,290

103,670

102,154

$ 109,290

Chicago Board Options Exchange, Incorporated and Subsidiaries
June 30, 2002 and 2001 (in thousands)

2002

2001

Assets
Current Assets:
Cash and cash equivalents
Accounts receivable
Income taxes receivable
Prepaid medical benefits
Other prepaid expenses
Other current assets
Total Current Assets

Investments in Affiliates

Land

Property and Equipment:
Building
Furniture and equipment
Less accumulated depreciation and amortization
Total Property and Equipment—Net

Other Assets:
Goodwill (less accumulated amortization—2002, $3,888; 2001, $3,130)
Software development work in progress
Data processing software and other assets (less accumulated amortization—

2002, $32,113; 2001, $21,762)

Total Other Assets—Net

Total

See notes to consolidated financial statements.

6,861
17,207
4,361
1,028
4,406
673
34,536

13,861

4,914

57,609
170,152
(157,621)
70,140

1,388
6,455

34,412
42,255

9,740
22,212
3,313
927
4,186
554
40,932

10,849

4,914

57,609
159,012
(139,434)
77,187

2,145
26,220

14,783
43,148

$ 165,706

177,030

consolidated balance sheets (continued)

June 30, 2002 and 2001 (in thousands)
Liabilities and Members’ Equity
Current Liabilities:
Accounts payable and accrued expenses
Marketing fee payable
Unearned income
Membership transfer deposits
Other deposits
Total Current Liabilities

Long-term Liabilities:
Long-term settlement obligations
Unearned income
Deferred income taxes
Total Long-term Liabilities

Total Liabilities

Members’ Equity:
Memberships
Retained earnings
Total Members’ Equity

Total

consolidated statements of cash flows

Chicago Board Options Exchange, Incorporated and Subsidiaries
For the Years Ended June 30, 2002 and 2001 (in thousands)
Cash Flows from Operating Activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash flows from operating activities:

Depreciation and amortization
Long-term settlement obligations
Deferred income taxes
Equity in income of CSE
Equity in loss of OneChicago
Gain on disposition of property
Changes in assets and liabilities:

Accounts receivable
Income taxes
Prepaid medical benefits
Other prepaid expenses
Other current assets
Accounts payable and accrued expenses
Marketing fee payable
Unearned income
Settlement payable
Membership transfer deposits
Other deposits

Net Cash Flows from Operating Activities

Cash Flows from Investing Activities:
Capital and other assets expenditures
OneChicago investment
Proceeds from disposition of property
Investments available-for-sale:
Proceeds from maturities
Purchases

Net Cash Flows from Investing Activities

Net (Decrease) Increase in Cash and Cash Equivalents

Cash and Cash Equivalents at Beginning of Year

Cash and Cash Equivalents at End of Year

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes

See notes to consolidated financial statements.

2002

2001

14,436
1,079
1,250
657
0
17,422

0
250
23,430
23,680

41,102

20,934
103,670
124,604

13,643
9,174
104
0
416
23,337

5,333
0
18,136
23,469

46,806

20,934
109,290
130,224

$ 165,706

177,030

2002

2001

(5,620)

7,136

29,709
(5,333)
5,294
(141)
1,483
(277)

5,005
(1,048)
(101)
(220)
(119)
793
(8,095)
1,396
0
657
(416)
22,967

(21,871)
(4,388)
413

0
0
(25,846)

(2,879)

9,740

6,861

24,634
(5,333)
7,718
(717)
0
0

(4,761)
15
(910)
728
(39)
(5,813)
9,173
0
(5,333)
(1,466)
37
25,069

(37,663)
0
0

115,752
(95,619)
(17,530)

7,539

2,201

9,740

notes to consolidated financial statements

Chicago Board Options Exchange, Incorporated and Subsidiaries
For the Years Ended June 30, 2002 and 2001

1. Summary of Significant Accounting Policies
Nature of Business – The Chicago Board Options Exchange (“the Exchange”) is a registered securities exchange, subject to oversight by
the Securities and Exchange Commission. The Exchange’s principal business is providing a marketplace for trading equity and index options.

Basis of Presentation – The consolidated financial statements include the accounts and results of operations of Chicago Board Options
Exchange, Incorporated, and its wholly owned subsidiaries, Chicago Options Exchange Building Corporation and, beginning in 2002,
Chicago Board Options Exchange, LLC. Inter-company balances and transactions are eliminated.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with maturities of three months or less from
the date of purchase.

Investments – All investments are classified as available-for-sale and are reported at cost which approximates their fair value in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

Accounts Receivable – Accounts receivable consist primarily of transaction, marketing and other fees receivable from The Options Clearing
Corporation (“OCC”), and the Exchange’s share of distributable revenue receivable from The Options Price Reporting Authority (“OPRA”).

Investments in Affiliates – Investments in affiliates represent investments in OCC, OneChicago, LLC (“ONE”) and The Cincinnati Stock
Exchange (“CSE”). The investment in OCC (20% of its outstanding stock) is carried at cost because of the Exchange’s inability to exercise
significant influence. The Exchange accounts for the investment in CSE (68% of its total certificates of proprietary membership) under the
equity method due to the lack of effective control over the operating and financing activities of CSE. During 2002 the Exchange made an
investment in ONE (40.3% of its outstanding stock). This investment is accounted for under the equity method.

Property and Equipment – Property and equipment are carried at cost. Depreciation on building, furniture and equipment is provided on
the straight-line method. Estimated useful lives are 40 years for the building and five to ten years for furniture and equipment. Leasehold
improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases.

Data Processing Software – Data processing software is carried at cost and amortized over five to seven years using the straight-line
method commencing with the date the software is put in service.

Goodwill – Goodwill is amortized over seven years to forty years for financial statement presentation and over fifteen years for income
tax purposes.

Impairment of Long-Lived Assets – Management reviews long-lived assets and the related intangible assets for impairment of value
whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the Exchange
determines it is unable to recover the carrying value of the assets, the assets will be written down using an appropriate method.
Management does not believe current events or circumstances provide evidence that suggests asset values have been impaired.

Income Taxes – Income taxes are determined using the liability method, under which deferred tax assets and liabilities are recorded
based on differences between the financial accounting and tax bases of assets and liabilities.

Other Deposits – Other deposits include amounts received from members for telephones in the Exchange facility and amounts for
Exchange sponsored conferences.

Unearned Income – Unearned income represents amounts received by the Exchange for which the contracted services have not been provided.

Fair Value of Financial Instruments – SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the
fair value of certain financial instruments. The carrying values of financial instruments included in assets and liabilities are reasonable
estimates of their fair value.

Reclassifications – Certain prior year amounts have been reclassified to conform with the current year presentation.

Adoption of New Accounting Policies – In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” which requires recognition of all derivative instruments in the balance sheet
as either assets or liabilities and the measurement of those instruments at fair value. SFAS No. 133 also requires changes in the fair value
of the derivative instruments to be recorded each period in current year earnings or comprehensive income depending on the intended
use of the derivatives. In June, 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and certain hedging activities. SFAS No. 133 and SFAS No. 138 were adopted by the Exchange
effective July 1, 2001. No transition adjustment was required.

Recent Accounting Pronouncement – In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which is
effective for the Exchange July 1, 2002. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives
will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified
intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. The Exchange has deemed the
impact of adopting SFAS No. 142 to be immaterial.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144
supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,” and the
accounting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal

notes to consolidated financial statements (continued)

of a segment of a business. The Statement also amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,”
to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144, which is effective for
the Exchange July 1, 2002, requires that long-lived assets held for sale be recorded at the lower of carrying value or fair value less cost to
sell. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows
and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be disposed of other than
by sale are considered held and used until disposed of. The Exchange has determined the impact of adopting SFAS 144 to be immaterial.

2. Investment in the Cincinnati Stock Exchange
The investment in CSE is accounted for using the equity method. Condensed financial statements of the CSE as of and for the years
ended June 30, 2002 and 2001 are as follows (in thousands):

Balance Sheets
Cash and cash equivalents
Securities available-for-sale
Other current assets
Long-term securities available-for-sale
Other long-term assets
Total assets

Current liabilities
Deferred income taxes
Members’ equity
Total liabilities and members’ equity

The Exchange’s share of members’ equity

Statement of Operations
Transaction revenue
Other revenue
Total revenues

Employee costs
Other expenses
Total expenses

Net income

The Exchange’s equity in net income

2002

4,955
2,090
9,007
8,540
5,661
30,253

14,543
1,252
14,458
30,253

10,308

2002

2,971
5,011
7,982

2,622
5,152
7,774

208

141

2001

434
2,569
2,624
10,223
3,167
19,017

4,276
558
14,183
19,017

10,200

2001

4,078
4,925
9,003

2,955
4,991
7,946

1,057

717

3. Related Parties
The Exchange’s equity in the net assets of OCC exceeded its cost by approximately $8.6 million and $10.0 million at June 30, 2002 and
2001, respectively. The Exchange collected transaction and other fees of $123.4 million and $202.4 million for the years ended June 30,
2002 and 2001, respectively, by drawing on accounts of the Exchange’s members held at OCC. For the years ended June 30, 2002 and
2001, respectively, the amount collected includes $19.3 million and $80.1 million of marketing fees (see note 8). The Exchange had a
receivable due from OCC of $11.1 million and $15.8 million at June 30, 2002 and 2001, respectively.

The Exchange incurred rebillable expenses on behalf of CSE, for expenses such as employee costs, computer equipment and office space
of $2.6 million and $2.3 million for the years ended June 30, 2002 and 2001, respectively. The Exchange had a receivable from CSE of
$485 thousand and $462 thousand at June 30, 2002 and 2001, respectively.

OPRA is a committee administered jointly by the five options exchanges and is authorized by the Securities and Exchange Commission to
provide consolidated options information. This information is provided by the exchanges and is sold to outside news services and customers.
OPRA’s operating income is distributed among the exchanges based on their relative volume of total transactions. Operating income
distributed to the Exchange was $18.9 million and $21.5 million for the years ended June 30, 2002 and 2001, respectively. The Exchange
had a receivable from OPRA of $4.5 million and $5.6 million at June 30, 2002 and 2001, respectively.

The Exchange, the Chicago Mercantile Exchange and the Chicago Board of Trade are partners in ONE, a joint venture created to trade
single stock futures. Certain ONE employees also have minority interests in the joint venture. ONE is a for-profit entity with its own management
and board of directors, and is separately organized as a regulated exchange. As of June 30, 2002, the Exchange has contributed $4.4 million
in capital to ONE. The Exchange had a receivable due from ONE of $391 thousand at June 30, 2002.

4. Leases
The Exchange leases office space with lease terms of six months and five years. Rent expenses related to leases during FY 2002 and
FY 2001 were $1.8 million and $2.0 million, respectively. Future minimum lease payments under these noncancelable operating leases are
as follows at June 30, 2002 (in thousands):

2003
2004
2005
2006
Total

661
652
669
627
2,609

notes to consolidated financial statements (continued)

5. Employee Benefits
Eligible employees participate in the Chicago Board Options Exchange SMART Plan (the “SMART Plan”). The SMART Plan is a defined
contribution plan, which is qualified under Internal Revenue Code Section 401(k). The Exchange contributed $3.4 million and $3.2 million
to the SMART Plan for the years ended June 30, 2002 and 2001, respectively.

Eligible employees participate in the Supplemental Employee Retirement Plan (the “SERP Plan”). The SERP Plan is a defined contribution
plan that is nonqualified by Internal Revenue Code regulations. The Exchange contributed $579 thousand and $1.1 million to the SERP
Plan for the years ended June 30, 2002 and 2001, respectively.

The Exchange also has a Voluntary Employees’ Beneficiary Association (“VEBA”). The VEBA is a trust, qualifying under Internal Revenue
Code Section 501(c)(9), created to provide certain medical, dental, severance, and short-term disability benefits to employees of the
Exchange. Contributions to the trust are based on reserve levels established by Section 419(a) of the Internal Revenue Code. During fiscal
2002 and 2001, the Exchange contributed $1.8 million and $1.7 million, respectively, to the trust.

6. Commitments
The Exchange reached a settlement in September 2000 with the Securities and Exchange Commission and the Antitrust Division of the
Department of Justice concerning their investigations into the past listing of certain options and other SEC regulatory issues. The Exchange
was not fined, but as part of these settlements, agreed to expend an amount on options-related surveillance, regulation and enforcement
that equals or exceeds $17.0 million in each of calendar years 2000 and 2001. The Exchange has satisfied this obligation.

In September 2000, the Exchange reached an agreement in principle to settle a consolidated civil class action lawsuit filed against the
Exchange and the other U.S. options exchanges and certain market maker firms. The Exchange agreed to pay $16.0 million in three
equal installments on or before October 16, 2000, July 1, 2001, and July 1, 2002. All payments have been made, and are being held in
escrow pending approval of the settlement agreement by the U.S. District Court for the Southern District of New York. Approval of the
settlement agreement is currently pending appellate review of the district court’s February 2001 order granting summary judgment in
favor of the defendants.

7. Income Taxes
A reconciliation of the statutory federal income tax rate to the effective income tax rate, for the years ended June 30, 2002 and 2001,
is as follows:

Statutory federal income tax rate
State income tax rate, net of federal income tax effect
Equity in income of CSE
Meals and entertainment
Political contributions
Lobby expenses
Other, net
Effective income tax rate

At June 30, 2002 and 2001, the net deferred income tax liability approximated (in thousands):

Deferred tax assets
Deferred tax liabilities
Net deferred income tax liability

2002

34.0%
4.7
(98.0)
(4.4)
(1.4)
(5.4)
6.6
(63.9%)

2001

35.0%
4.7
(2.2)
1.4
0.4
1.7
(1.0)
40.0%

2002

9,261
32,691
23,430

2001

8,887
27,023
18,136

Deferred income taxes arise principally from temporary differences relating to the use of accelerated depreciation methods for income tax
purposes, capitalization of software, licensing fees, funding of the VEBA trust, and beginning in 2002, undistributed earnings from the
Exchange’s investment in CSE.

Through 2001, consistent with the requirements of FASB Statement No. 109, CBOE has measured the difference between the book
and tax basis of its investment in CSE using a deferred tax liability rate of zero. This rate was reflective of the expected tax-free means
of recovering the investment in CSE through the ultimate purchase of the shares necessary to effectuate a statutory merger.

Due to continued interest by several outside parties in the potential purchase of the Exchange’s investment in CSE and CBOE’s refined
strategy of possibly selling the CSE investment, management now believes that CBOE’s expected realization of its investment in CSE will
most likely be through the sale of its investment in CSE, which will trigger a capital gain at CBOE’s normal tax rate. Therefore, beginning
in 2002, CBOE has modified the deferred tax liability rate to match the changed disposition strategy.

8. Marketing Fee
On July 1, 2000 the Exchange imposed a $.40 per contract marketing fee on market makers and DPMs when executing transactions with
non-Exchange market makers. This fee was suspended effective August 1, 2001, however the Exchange still facilitates the collection
of payment for order flow funds from DPMs and distributes order flow funds to order provider firms, as directed by the DPMs each month.
As of June 30, 2002 and 2001 amounts held by CBOE on behalf of others included accounts receivable balances of $1.1 million and
$5.6 million, respectively and a cash balance of $3.5 million as of June 30, 2001.

notes to consolidated financial statements (continued)

9. Litigation
In May 2001, in an action entitled Cathedral Trading, L.L.C. et al v. CBOE et al., the Exchange was sued by six individuals and two
corporations, who described themselves as retail customers, claiming that the Exchange made false representations about the operation
of various Exchange systems and engaged in fraudulent practices in connection with plaintiffs’ options transactions. The complaint also
alleged that they were harmed by a regulatory inquiry that the Exchange initiated. Plaintiffs alleged that the Exchange thereby violated
certain sections of the Securities Exchange Act of 1934, the Securities Act of 1933, the antitrust laws and various Illinois statutes
concerning fraudulent practices and that the Exchange defrauded them, breached contractual obligations, defamed plaintiffs and inter-
fered with their contractual relations. The complaint sought damages in the amount of $100.0 million, plus treble damages for the alleged
antitrust violations, attorneys’ fees, costs, and interest. On April 30, 2002, the court granted defendants’ motion to dismiss the complaint
and entered judgment in favor of the Exchange. Plaintiffs did not appeal from that decision.

On September 27, 2001, in an action entitled Kundrat et al. v. CBOE et al., the Exchange was sued by four individuals, who described
themselves as retail customers, claiming that the Exchange refused to execute plaintiffs’ options transactions at the disseminated quote,
improperly faded quotes, failed to send timely trade and cancellation confirmations and improperly busted trades. Plaintiffs’ amended
complaint claims that the Exchange’s alleged actions violated the Securities Exchange Act of 1934, the antitrust laws, and breached con-
tracts that the Exchange supposedly had with plaintiffs. Plaintiffs also allege that they were harmed by an Exchange regulatory inquiry and
that the inquiry interfered with other purported contractual relations. The amended complaint seeks damages in excess of $75 thousand,
plus treble damages in connection with the antitrust claims, interest, attorneys’ fees and costs. The Exchange’s motion to dismiss has been
fully briefed and is pending before the Court.

The Exchange believes that it has meritorious defenses and intends to vigorously defend itself in the Kundrat action. However, the
Exchange cannot presently estimate the amount of loss, if any, that may result. The ultimate outcome of this litigation cannot presently
be determined and no allowance for loss has been made in these financial statements.

10. Subsequent Events
Effective July 1, 2002 the Exchange entered into an unsecured revolving credit agreement providing for borrowings up to $10.0 million.
Borrowings under the agreement bear interest based on LIBOR or prime interest rates. The agreement, which will expire on June 30, 2003,
is intended to meet short-term working capital requirements if the need were to occur. The agreement requires the Exchange to maintain
certain net worth and financial ratios.

independent auditors’ report

To the Board of Directors and Members of the Chicago Board Options Exchange, Incorporated:

We have audited the accompanying consolidated balance sheets of the Chicago Board Options Exchange, Incorporated and subsidiaries
(the “Exchange”) as of June 30, 2002 and 2001, and the related consolidated statements of income and retained earnings and of cash
flows for the years then ended. These consolidated financial statements are the responsibility of the Exchange’s management. Our
responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The
Cincinnati Stock Exchange (“CSE”) for the years ended June 30, 2002 and 2001, the Exchange’s investment in which is accounted for by
use of the equity method. The Exchange’s equity of $10.3 million and $10.2 million in the CSE’s net assets at June 30, 2002 and 2001,
respectively and of $141 thousand and $717 thousand in that Exchange’s net income for the respective years then ended are included in
the accompanying financial statements. The financial statements of CSE were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for CSE, is based solely on the report of such other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material
respects, the financial position of the Exchange and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and
their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

August 21, 2002

board of directors

William J. Brodsky
Chairman of the
Board and Chief
Executive Officer

Mark F. Duffy
Vice Chairman and
Chairman of the
Executive Committee

Robert J. Birnbaum
Former President
New York Stock
Exchange
American Stock
Exchange
Public Director

Thomas A. Bond
Independent
Market Maker

David Johnson
Managing Director
Morgan Stanley

Silas Keehn
President (Retired)
Federal Reserve Bank
of Chicago
Public Director

Leon T. Kendall
Professor of Finance
and Real Estate
The Kellogg School of
Management
Northwestern University
Public Director

Daniel P. Koutris
Vice President
Knight Financial
Products

Duane R. Kullberg
Former Chief
Executive Officer
1980-1989
Andersen Worldwide
Public Director

Richard F. Lynch
Senior Vice President
Equity Trading
Prudential Securities

Roderick Palmore
Senior Vice President
Sara Lee Corporation
Public Director

James P. MacGilvray
Executive Vice
President
UBS PaineWebber

Thomas H. Patrick, Jr.
Managing Director
Equity Linked Trading
for the Americas
Merrill Lynch & Co., Inc.

Michael J. Post
President
Seats Exchange, Inc.

Robert A. Rosholt
Chief Financial and
Investment Officer
Nationwide Mutual
Insurance Company
Public Director

R. Eden Martin
Partner
Sidley Austin
Brown & Wood
Public Director

Thomas A. Petrone
Managing Director
Global Equity Derivatives
Salomon Smith Barney

John E. Smollen
Managing Director
SLK/Hull Derivatives,
LLC

Anthony D. McCormick
Vice President
Equity Options
Schwab Capital
Markets

Craig C. Messinger
Executive Vice
President
Fidelity Capital Markets

Susan M. Phillips
Former Governor
Federal Reserve Board
Dean
School of Business
and Public Management
The George
Washington University
Public Director

John M. Streibich
Designated Primary
Market Maker
Susquehanna
Investment Group

Alvin G. Wilkinson
Market Maker
Wilkinson Management,
LLC

standing committees of the board

Audit Committee
Duane R. Kullberg,

Chairman

Daniel P. Koutris
Roderick Palmore

Compensation
Committee
Mark F. Duffy,
Chairman

William J. Brodsky

committees of the membership

Allocation/Special
Product Assignment
Committee
Licia J. Leslie,
Chairman
David C. Adent
Terrence J. Andrews
Michael R. Benson
James D. Coughlan
Joseph A. Frehr
Stuart J. Kipnes
Gerald T. McNulty
John B. Niemann
William J. O’Keefe
Benjamin E. Parker
Steven N. Tumen

Appeals Committee
Patrick J. McDermott,

Chairman
Orlando Alfonso
Matthew Arndt
Brett T. Benson

Timothy Benton
Frank Brodlo
Andrew H. Carolan
Michael T. Considine
Greg DeFalco
Bruce D. DiDominicis
David A. Filippini
James P. Fitzgibbons
Jonathan G. Flatow
Michael D. Friedman
James Gazis
Timothy P. Gill
Thomas A. Hamilton, Jr.
Mark A. Harmon
Michael P. Held
Andrew Hodgman
Paul J. Jiganti
B. Michael Kelly
Richard Kevin
John A. Lalowski
Kelly Luthringshausen
Daniel R. McCarthy
Patrick J. Naughton

Daniel P. Koutris
Duane R. Kullberg
James P. MacGilvray
R. Eden Martin

Executive Committee
Mark F. Duffy,
Chairman

William J. Brodsky

Robert J. Birnbaum
Daniel P. Koutris
James P. MacGilvray
John M. Streibich

John T. Nemeth
John B. Niemann
Renee P. O’Bryan
Daniel M. O’Donnell
Terrence M. O’Donnell
Daniel O’Grady
Daniel J. O’Shea
Peter Osborne
Douglas W. Prskalo
Gregg A. Prskalo
Sondra C. Rabin
W. Scott Schwanke
Neal Shamis
James David Short
Antanas Siurna
Svebor Smolic
James D. Sullivan
William Ulivieri
Wayne A. Weiss
Dennis M. Wetzel
Francis Wondrasek

Arbitration Committee
Daniel A. Baldwin,

Chairman

Thomas R. Beehler
Robert I. Chukerman
Richard M. Coplan
Michael D. Coyle
Christopher P. Cribari
David Dobreff
Stephen P. Donahue
Douglas H. Edelman
Brian H. Egert
David A. Eglit
Jennifer Abrams Fisher
James P. Fitzgibbons
Jonathan G. Flatow
Theodoric Flemister
Mark R. Fluger
Ann Grady
Peter C. Guth
Thomas A. Hamilton
Michael P. Held
William G. Hohenadel
Paul J. Jiganti

Mark E. Kalas
Joseph G. Kinahan
John A. Koltes
John A. Lalowski
Michael Lyons
Patrick J. McDermott
Brock R. McNerney
Nina V. Milovac
Joseph D. Mueller
Scott O’Connell
Charles W. Palm
Donald F. Pratl
Steven M. Quirk
Sondra C. Rabin
Peter V. Rogus
Scott E. Schram
William Shimanek
Fred Teichert
John H. Waterfield
Patrick W. Wehr
Dennis M. Wetzel
James U. Wieties
Corey D. Zimmerman

committees of the membership (continued)

Business Conduct
Committee
John F. Burnside,

Chairman

David T. DeArmey,
Vice Chairman
Patrick J. Caffrey
Raymond P. Dempsey
Robert C. Errico
Richard I. Fremgen
Maureen C. Guilfoile
Peter C. Guth
Allen B. Holeman
Gary P. Lahey
Steven A. O’Malley
Joseph F. Sacchetti
Margaret E. Wiermanski
J. Slade Winchester

CBOE/CBOT Joint
Advisory Committee
John E. Callahan,

Chairman
David Johnson
William J. Terman
Ex-Officio
Thomas Corbett
Norman Friedman
Ross G. Kaminsky
Brian A. Novak
Paul L. Richards
Gregg Rzepczynski
Robert C. Sheehan
James Slykas
Jesse L. Stamer

Clearing Procedure
Committee
Michael J. Ryan,

Chairman

John E. O’Donnell,
Vice Chairman

Mark A. Baumgardner
Gordon Baytala
John R. Beres
Mitchell R. Bialek
Patrick K. Blackburn
Louis G. Buttny
William F. Carik
Arthur Goldberg
John Hiatt, Sr.
John J. Kaminsky
Matthew Liszka
Anthony Monaco
Ralph Mueller
Maureen Pacocha
Frank Pirih
Susan Shimmin
Thomas C. Smith
Michael E. Trees

Election Committee
Joanne Moffic-Silver,

Chairman
Nancy Nielsen
Raedelle Pancake

Equity Floor
Procedure Committee
Edward T. Tilly,
Chairman

Terrance G. Boyle
Anthony J. Carone
Daniel P. Carver
James D. Coughlan
Stephen M. Dillinger
Mark A. Esposito
Patrick S. Hamilton
Kevin J. Hincks
Paul J. Jiganti
Ross G. Kaminsky
Stuart J. Kipnes
Benjamin M. Klein
Licia J. Leslie
David F. Miller, Jr.
Kenneth D. Mueller
Ex-Officio
John E. Smollen, Jr.

Equity Market
Development and
Market Performance
Committee
John M. Streibich,

Chairman

Terrence J. Andrews
Susan C. Bannon
Michael R. Benson
Richard H. Bode
Edward G. Boyle
Terrence E. Cullen
Michael A. Dalesandro
Richard W. Fuller, Jr.
James Gazis
Monte J. Henige
B. Michael Kelly
Jack Kennedy
Donald H. Klein, Jr.
John B. Niemann
John P. O’Grady
Joel A. Tenner
John H. Waterfield, III
Thomas G. Weston

Exemption
Committee
Peter M. Najarian,

Chairman

Jeffrey A. Cesarone,
Vice Chairman
Patrick J. Caffrey
John W. Fickle
Corey L. Fisher
Daniel P. McCollar
Michael N. Suarez

Joseph M. O’Donnell
Donald F. Pratl
David H. Scott
Lawrence E. Spieldenner
James U. Wieties
Adam J. Zechman
Corey D. Zimmerman

Financial Planning
Committee
Daniel P. Koutris,

Chairman
Alan J. Dean
Stephen P. Donahue
Douglas H. Edelman
William J. Ellington
Corey L. Fisher
Fred O. Goldman
Jeffrey T. Kaufmann
Kevin J. Keller
Timothy G. Keller
John P. Robinson
Frank A. Roszkiewicz
Robert Silverstein
Timothy M. Sommerfield

Financial Regulatory
Committee
Richard E. Schell,

Chairman

Margaret E. Wiermanski,

Vice Chairman
Matthew Abraham
William F. Carik
Frank Catris
David T. DeArmey
Mark Gannon
Fred O. Goldman
John Hiatt, Sr.
Judith M. Kula
Steven O’Malley
Janice Rohr
Ex-Officio
Linda Haven
Andrew Naughton
Jacqueline Sloan

Floor Directors
Committee
William J. Brodsky,

Chairman

Thomas A. Bond
Mark F. Duffy
David Johnson
Daniel P. Koutris
Michael J. Post
John E. Smollen
John M. Streibich
Alvin G. Wilkinson

Facilities Committee
Christopher M. Wheaton,

Chairman

William J. Ellington,
Vice Chairman
Patrick M. Athern
David A. Dobeff
Robert R. Fabijanowicz
Patricia A. Kevin-Schuler

Floor Officials
Committee
Raymond P. Dempsey,

Chairman

Daniel C. Zandi,
Vice Chairman
Daniel A. Baldwin
Darryl A. Behm

Patrick J. Caffrey
James K. Corsey
Brian M. Dowd
Damon M. Fawcett
Craig R. Johnson
Daniel P. McCollar
Thomas W. McEntegart
David F. Miller Jr.
Sean P. Moran
Joseph T. Nowicki
Ronald M. Pittelkau
Henry M. Robinson-Duff
Paul T. Savoie
John P. Stowick

Index Floor
Procedure Committee
Richard E. Tobin,

Chairman

Jonathan G. Flatow,
Vice Chairman
Terrence J. Brown
Jeff Burianek
Terrence E. Burke
Richard Cichy
Michael F. Gallagher
Sean W. Haggerty
Kevin J. Kearns
Emmanuel L. Liontakis
John P. Mariner
Michael P. McGuire
Michael Mercucci
Robert C. O’Mullan
Michael R. Quaid
Keith G. Siemiawski
Paul C. Stefanos
James D. Sullivan
Scott F. Tinervia

Index Market
Development and
Market Performance
Committee
Jonathan G. Flatow,

Chairman

Jeffrey S. Latham,
Vice Chairman
Dennis A. Carta
David A. Filippini
Matthew J. Filpovich
Francis P. Gleason
Jonathan M. Grodnick
I. Patrick Kernan
Jeffrey L. Klein
Todd A. Koster
Joseph A. Mareno
Christopher Nevins
Joshua G. Ortego
Daniel J. O’Shea
Douglas W. Prskalo
Steven M. Quirk
Joseph F. Sacchetti
Peter H. Schulte

Lessor Advisory
Committee
Mark F. Duffy,
Chairman

Bill Power,

Vice Chairman
Lawrence J. Blum
Peter C. Guth
Paul J. Jiganti
Ruth I. Kahn
Paul Liang
Raymond G. Meyer
Michael M. Mondrus
Robert Murtagh
Martin P. O’Connell
Michael J. Post
William S. Persky
Irwin Segal
Robert Silverstein

Member Firm
Operations Committee
Gerald T. McNulty,

Chairman
Thomas Berk, III
J. Peter Brown
Jeffrey J. Bughman
Daniel P. Carver
Steven M. Chilow
David Creagan
Raymond P. Dempsey
Robert E. Duddy
William J. Ellington
Joseph A. Frehr
Francis P. Gleason
Jeffrey S. Kantor
Jeffrey T. Kaufmann
Stuart Kipnes
Donald Klein
Jeffrey S. Latham
James C. Lavery
Nicholas L. Marovich
Bruce A. Martin
Patrick J. McDermott
David F. Miller
Mark T. Morse
John E. O’Donnell
Mark Oakley
Donald F. Pratl
Michael Stowick
Michael Trees
J. Todd Weingart

Membership
Committee
Robert B. Gianone,

Chairman

Richard W. Fuller,
Vice Chairman
Anthony P. Arciero
Keir S. Collins
Matthew J. Filpovich
Ian R. Galleher
David C. Ho
Charles F. Imburgia
William M. Kennedy
Jeffrey H. Melgard
Lloyd William Montgomery
Andrew B. Newmark
Philip G. Oakley
Steven Padley
Gregg A. Prskalo

committees of the membership (continued)

James P. Rouzan
Mary Rita Ryder
Gregg Rzepczynski
Stuart D. Saltzberg
Thomas C. Smith, III
Robert J. Wasserman

Modified Trading
System (MTS)
Appointments
Committee
William J. O’Keefe,

Chairman

Anthony P. Arciero
Daniel P. Carver, Sr.
Randy N. Chandra
Mark F. Duffy
Michael B. Frazin
Joseph A. Frehr
Kevin J. Keller
Gerald T. McNulty
James Meade
John M. Streibich

New Product
Development
Committee
Boris Furman,
Chairman

Martin O’Connell,
Vice Chairman
James Anstrand
Richard Clarke
Michael Gallagher
Jason Knupp
Brian Novak
Dominic Salvino
Matthew Shapiro
Robert Sheehan

Nominating
Committee
William C. McGowan,

Chairman

Bruce I. Andrews
James J. Boyle
Steven M. Chilow
Jonathan G. Flatow
Paul J. Jiganti
Jeffrey Kirsch
Newton N. Minow
John R. Power
Richard L. Thomas

Screen-Based
Trading Committee
Paul J. Jiganti,
Chairman

John Favia,

Vice Chairman
Christine Bookmyer
James J. Boyle
Terrance G. Boyle
Anthony J. Carone
John L. Cowden
J. David Fikejs
James Gray
Joseph G. Kinahan
John Knuth
Thomas M. O’Donnell
Joseph Sellitto
Antanas Siurna
Phillip E Teuscher

SPX Floor Procedure
Committee
Richard T. Marneris,

Chairman

Jeffrey J. Kupets,
Vice Chairman
Salvatore J. Aiello
Colin J. Barth
Eoin T. Callery
S. Mark Cavanagh
Michael P. Cozzie
Timothy P. Feeney
Michael J. Hayes

Thomas H. Jarck
I. Patrick Kernan
John J. Massarelli
Michael M. Mayor
Mark T. Morse
Christopher Nevins
Daniel J. Quinn
David A. Scatena
Timothy G. Weinand

Stock Selection
Committee
Benjamin Parker,

Chairman
David Adent,

Vice Chairman

Lanny Brooks
John Colletti
Mark G. Eddy
Steven Hessing
Michael Looper
Brock R. McNerney
Jeff Melgard
Dora Morano-Koop
James Relihan
John Superson
Timothy J. Werner
J. Slade Winchester
Corey Zimmerman

special committees

Public Directors
Governance
Committee
Robert J. Birnbaum,

Chairman

Duane R. Kullberg
R. Eden Martin
Susan M. Phillips

Regulatory Oversight
Committee
Robert J. Birnbaum,

Chairman

Duane R. Kullberg
R. Eden Martin
Susan M. Phillips

task forces

Governance Task
Force
Duane R. Kullberg,

Chairman

Robert J. Birnbaum
Thomas A. Bond
Michael J. Post
Alvin G. Wilkinson

advisory committees

Compliance Advisory
Panel
Kevin Ahearn
David A. DeMuro
Robert C. Errico
Allen Holeman
James Kehoe
Anthony J. Leitner
Mark Manning
Michael Moran
Michelle Morgan
Lou Moschetta
Robert Palleschi
Luigi Ricciardi
Gary Stegeland
Mark Straubel
Brian Underwood

Institutional Traders
Group
Alan Augarten
John Brett
Arnaud Desombre
Jerry Donini
Ralph Edwards
Joseph Gahtan
Kenneth MacKenzie
Arthur Mbanefo
Val Mihan
Larry Motola
Mark Neuberger
Van Nguyen
Brett Overacker
Ralph Reynolds

Regional Firm
Advisory Committee
Vince Bonato
Louis DePaul
Dino Galeazzi
Dalton Givens
Mary Hanan
Sharon Jensen
James Knight
Jon Matthai
Stephen Mitchell
Denny Moorman
Ann Mueller
Henry Nothnagel
Nancy Penwell
Wendy Rea
John Sagness
William Sanford
James Schmitz
Terri Strickland-Smith
Carol Zenk

Strategy
Implementation
Task Force
Edward J. Joyce,

Chairman
Thomas A. Bond
Terrance G. Boyle
William J. Brodsky

Retail Advisory
Committee
Angelo Benedetto
Peter Biebel
Pat Blackburn
Matthew Gelber
Rich Gueren
Laura Holder
Edward Lynn
Craig Mihoulides
Gregory Miller
Philip Polera
William Ryan
Michael Schwartz
Thomas Stotts
Timothy Strazzini
Stewart Winner

Systems Committee
John E. Smollen,

Chairman
Brian T. Batt
Daniel Condon
Thomas J. Corbett, Jr.
Greg J. DeFalco
Stephen M. Dillinger
Samuel L. Eadie, Jr.
George P. Hanley
John T. Hayden
John J. Kaminsky
Mark J. Karrasch
Jeffrey S. Latham
David F. Miller, Jr.
Kenneth D. Mueller
Thomas J. Neil
John E. O’Donnell
William L. Patterson
Steven J. Pettinato
Johnson T. Thomas
Ex-Officio
Daniel P. Koutris
Edward T. Tilly

Mark F. Duffy
Mark A. Esposito
Stuart J. Kipnes
Anthony D. McCormick
Thomas A. Petrone
John E. Smollen
Edward T. Tilly

Managing Directors
Advisory Committee
John Andersen
Joseph Bile
Joseph Dattolo
Lawrence Hanson
David Johnson
Ronald Kessler
James MacGilvray, Jr.
Douglas Matthews
Anthony McCormick
Kurt Muller
Kevin Murphy
Mike Perry
Chris Sandel
Simon Terner
Joseph Valenza

executive officers and staff officials

Executive
William J. Brodsky
Chairman and Chief
Executive Officer

Mark F. Duffy
Vice Chairman and
Chairman of the
Executive Committee

Edward J. Joyce
President and Chief
Operating Officer

Business
Development
Edward L. Provost
Executive Vice
President

Thomas A. Brady
Vice President
Member Trading
Services

Daniel R. Hustad
Vice President
Market Quality and
Assurance

Matthew T. Moran
Vice President
Institutional Marketing

Debra L. Peters
Vice President
The Options Institute

William J. White, Jr.
Vice President
Member Trading
Services

Civic and
Governmental Affairs
Amy Zisook
Vice President

Corporate
Communications
Carol E. Kennedy
Vice President

Corporate Planning
and Research
Richard G. DuFour
Executive Vice
President

Joseph Levin
Vice President
Research and Product
Development

Finance and
Administration
Alan J. Dean
Senior Vice President
and Chief Financial
Officer

clearing member firms

A A Sage Corporation
A.G. Edwards & Sons, Inc.
ABN AMRO, Inc.
ABN AMRO Sage
Corporation

Advest, Inc.
Banc One Capital
Markets, Inc.
Bank of America
Securities, LLC

Credit Suisse First

Boston Corporation
Deutsche Bank Alex

Brown, Inc.

Donaldson Lufkin &

Jenrette Securities
Corporation/
Pershing Division

E.D. & F. Man

Bear Stearns Securities

E.D. & F. Man

Corp.

BNP Securities
(U.S.A.), Inc.

BNY Clearing Services,

LLC

BNY ESI & Co. Inc.
Botta Capital

Management, LLC

Carr Futures, Inc.
Charles Schwab &

Co., Inc.

CIBC Oppenheimer Corp.

International, Inc./
Retail Customer

Ernst & Co. (Corporation)
Fahnestock & Co., Inc.
FIMAT, USA, Inc.
First Options of
Chicago, Inc.

Goldman, Sachs & Co.
Herzog, Heine, Geduld,

Inc.

ING TT&S (U.S.)
Securities, Inc.

Richard Lewandowski
Vice President
Regulatory Services

Curt Schumacher
Vice President
Systems Operations

Margaret Williams
Vice President
Market Regulation

Trading Operations
Philip M. Slocum
Senior Vice President

Donald R. Patton
Controller and
Vice President
Accounting

James P. Roche
Vice President
Market Data Services

Deborah Woods
Vice President
Human Resources

Legal
Joanne Moffic-Silver
General Counsel and
Corporate Secretary

Systems
Gerald T. O’Connell
Executive Vice
President and Chief
Information Officer

James J. Neceda
Vice President
Systems Development

Arthur B. Reinstein
Deputy General
Counsel

Mark S. Novak
Vice President
Systems Development

J. Patrick Sexton
Assistant General
Counsel

Larry L. Pfaffenbach
Vice President
Systems Planning

Regulatory Services
Douglas Beck
Vice President
Market Monitoring

Lawrence J.
Bresnahan
Vice President
Financial and Sales
Practice Compliance

Roberta J. Piwnicki
Vice President
Systems Development

Gautam Roy
Vice President
Software

Gail Flagler
Vice President
Reporting Services

John T. Johnston
Vice President
Execution and
Reporting Services

Thomas P. Knorring
Vice President
Trade Processing

Anthony Montesano
Vice President
Trading Operations

Michael Todorofsky
Vice President
Market Operations

Timothy T. Watkins
Vice President
Trading Systems
Development

Merrill Lynch

RBC Dominion

Professional Clearing

Securities Corporation

ING Barings Corp.
Instinet Clearing
Services Inc.

Interactive Brokers, LLC
J.J.B. Hilliard, W.L.

Lyons, Inc.

Inc.

K.A., Division of First

Knight Execution
Partners, LLC

K.V. Execution Services,

Morgan Keegan &
Company, Inc.
Morgan Stanley &
Company, Inc.

National Financial
Services, LLC
Nomura Securities
International, Inc.
O’Connor & Company,

J.P. Morgan Securities,

Morgan Stanley Dean

Witter Inc.

Inc.

LLC

La Branche Financial

Services, Inc.

Ladenburg, Thalman &

PaineWebber, Inc.
PAX Clearing
Corporation

Co., Inc.

Lakeshore Securities, L.P.
Lehman Brothers, Inc.
LIT, Division of First

Options of Chicago, Inc.

Merrill Lynch, Pierce,
Fenner & Smith, Inc.

PAX Clearing Corp.–AB
Preferred Capital
Markets, Inc.

Prudential Securities, Inc.
Raymond James &
Associates, Inc.

RBC Dain Rauscher, Inc.

Refco Securities, LLC
Robert W. Baird &

Co., Inc.

Salomon Brothers, Inc.
Salomon Smith Barney,

SG Cowen Securities

Corporation

SLK-Hull Division of
First Options Inc.

Spear, Leeds & Kellogg
Stephens, Inc.
Stifel, Nicolaus &
Company, Inc.
Timber Hill, LLC
TradeLink, LLC
UBS Warburg, LLC
U.S. Clearing Corp.
Weiss, Peck & Greer, LLC
Ziv Investment
Company

International, Inc.

Options of Chicago, Inc.

“Dow Jones,®” DIAMONDS,®
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