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The Chicago Board Options Exchange intends to offer its own version of a new options-trading service that has drawn loud protests from others in the stock-options industry, including the CBOE itself.

The CBOE has submitted to market regulators exchange rules that would let options traders carry out transactions that bypass competition from rival traders, a concept that CBOE executives sharply criticized when a rival exchange first outlined the idea nearly two years ago.

The CBOE, owned by parent CBOE Holdings Inc. (CBOE), now looks to introduce such "qualified contingent cross" orders after regulators in late February approved the long-debated function developed by the International Securities Exchange.

"CBOE has opposed the ISE proposal, but believes we now need to adopt rules to introduce a similar order type for competitive reasons, as indicated in our qualified contingent order briefs and comment letters responding to the ISE proposal," exchange officials wrote in a filing submitted to the Securities and Exchange Commission late last week.

The orders allow two options traders to agree to do a trade at a specified price, and execute it without exposing it to other market participants, provided the order is linked to a stock trade and meets certain other criteria.

The concept has proven divisive in the options industry, particularly among exchanges that have warned the service could put options-trading on a path to resemble the stock market, where nearly one-third of all trades now are carried out privately.

CBOE Chief Executive William Brodsky, speaking at an industry event in March, said the development was a "terrible mistake" that sends the options business onto a "slippery slope."

Market analysis firm Trade Alert LLC estimated that nearly 100,000 options contracts per day are now being executed via the ISE's qualified contingent cross orders. On March 31, one such order traded 33,000 options on the iShares FTSE China 25 index fund, linked to a one-million share transaction, according to the firm's research.

One big concern of critics like the CBOE is that market-makers that provide liquidity to the options industry could come under pressure if more trading gets done on a party-to-party basis. ISE executives have argued that the service will put all-electronic exchanges on more even standing with physical trading floors, where traders can negotiate similar private trades that are only briefly offered up to competitors.

Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext (NYX), which run two options exchanges each, have also sought regulatory approval to roll out their own versions of the qualified contingent cross orders. Like the CBOE, both previously raised concerns around the function.

BATS Global Markets, which introduced an options market in early 2010, is also interested in developing a version.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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