The equity options market is related to and affected by the equities market. In absolute terms, the equities market has experienced enormous growth in trading volume in the past fifteen years. In 1984, the combined average daily trading volume of Nasdaq and NYSE stocks was approximately 151 million shares per day. By 2003, that volume had increased to approximately 3.1 billion shares per day. Increased issuances of equity, increased self-directed and online trading and reduced transaction costs due in part to technology all contributed to this growth, which in turn fueled growth in options trading volume.

The market for trading equity options has also increased dramatically. By the end of 1974, the average daily trading volume on the CBOE exceeded 22,000 contracts. In 1981, annual volume for the options trading industry exceeded 100 million contracts for the first time, representing an average of over 430,000 contracts per day. Contract trading volume within the U.S. equity options industry has increased at a compound annual rate of 20% from 1993 to 2003 (the last ten years) and, despite some declines during the recent bear market, has seen a resurgence since the beginning of 2003. In 2003, the average daily trading volume reached 3,294,874 contracts per day. The U.S. options industry’s performance in 2003 was characterized by unusual robustness and innovation. Trading volume within the industry set a new record as 830,308,227 equity options contracts were traded, surpassing the previous record of 722,680,249 contracts that was set in 2001. Volume has seen an even sharper upturn in 2004, with average daily trading volume in the first quarter of 2004 increasing 63% over average daily trading volume during the same period in 2003. For the quarter ended March 31, 2004, the OCC cleared an ADV of 4.7 million options in individual equities, a 65% increase over the same period in 2003.

The Company’s 665 listed options are divided into ten groups, known as bins. New options series are assigned to their respective bins by an allocation committee which consists of 13 individuals who are employees of EAMs and appointed to the committee by the Company’s CEO. The exchange, prior to the start of trading, originally sought to establish a degree of balance in each bin by assigning listings after considering the securities exchange, volatility, price and volume of the underlying stock as well as the country and industry sector of the related issuer. Since the Company’s inception, however, the Company has made no efforts to maintain any such balance and now typically allocate listings to bins after considering the level of performance and customer service demonstrated by the PMMs of the bins seeking to acquire those new listings. Because the levels of performance and customer service vary across bins, some bins are stronger than others and therefore enjoy more success in acquiring desirable new listings.

Market makers on all exchanges must trade to profit. Because they can quote at both the bid and ask prices simultaneously, market makers are also able to buy and sell simultaneously, profiting from the spread between the bid and ask prices. While market makers, with their obligations to quote, provide a market for other traders, they are also in business to profit for themselves. In order to do so, they must be able to exploit the bid/ask spread by trading often and in significant volume. Thus, market makers depend on order flow to trade, profit and generally conduct their business. Order flow is essential to the business of market making, and market makers generally seek to trade on exchanges where order flow is greatest. The market maker exchange structure is based on the principle that market makers can be enlisted to provide markets in their options listings in return for the opportunity to profit from the bid/ask spread. Thus, the profit opportunity for the market maker arises from its trades against order flow rather in its role in providing markets across several listings. Market makers could theoretically produce better profits if they were able to abandon their low volume listings for listings with robust order flow.

Transaction fee revenues increased 56.9%, from $13.8 million for the three months ended March 31, 2003 to $21.7 million for the comparable period in 2004.

Market data revenues increased 25.0% from $3.1 million for the three months ended March 31, 2003 to $3.9 million for the comparable period in 2004.

Marketing and business development expense decreased 36.3% from $1.3 million for the three months ended March 31, 2003 to $0.8 million for the comparable period in 2004.