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UPDATE 2-CBOE Holdings profit down 16 pct but beats Street view

* Q3 net 43 cents a share, vs 38 cents a share Street view

* CEO says banking on volatility and other exclusive contracts

* Overseas growth has ``tremendous potential'': CEO Brodsky

Nov 1 (Reuters) - CBOE Holdings Inc said Thursday that third-quarter earnings fell 16 percent, less than analysts had expected, as the operator of the biggest and oldest U.S. stock-options market charged more for its products and services.

The results underscore how Chief Executive Officer William Brodsky has capitalized on the exchange's exclusive products, like options on the CBOE VIX ``fear'' index, to cushion profits from trading declines and rising competition other exchanges.

Brodsky wants to take the success he has had in volatility-tied contracts overseas, where he told analysts on a conference call Thursday he sees ``tremendous potential.''

The exchange plans to open a hub in London next year, and has expanded trading hours for more trading from abroad.

CBOE reported net income of $37.7 million, or 43 cents a share, excluding one-time tax items. That was down from $44.7 million, or 50 cents a share, a year earlier.

Analysts had on average had expected per share profit of 38 cents, according to I/B/E/S Thomson Reuters.

Trading was down 22 percent in the quarter from a year earlier, but revenue dropped at only half that pace, to $128.3 million.

While rivals trading identical and interchangeable products have little pricing power in the shrinking market for stock-options, Brodsky has hiked fees for contracts that can only be traded at CBOE.

The company also raised fees for exchange services, and benefited from a rise in disciplinary fines on traders.

While the rise in trader fines is probably a one-time blip, ``We believe some of the revenue upside should be sustainable,'' Alex Kramm, an analyst at UBS, said in a note to investors.

MARKET SHARE

CBOE stole business from its competitors in the quarter, grabbing 29.3 percent of the market in the third quarter, up from 27.5 percent in the prior year quarter, it reported.

But Brodsky noted a decline in market share in single-stock options, and said the exchange also plans a new fee-discount program for high-volume traders. CBOE's two options exchanges compete with eight other U.S. stock-options markets.

Chief financial officer Alan Dean said the fee reductions should increase overall revenue by boosting volume.

The company said expenses for 2012 will be near the mid-point of its guidance of $173 million to $178 million, more than it had earlier expected because of higher legal fees and severance costs.

``Our goal is to hold overall expenses at the rate of inflation,'' Dean said on the call.

CBOE had $160.3 million in cash at the end of the quarter, and executives have said they only need $40 million to $60 million on hand.

That large gap has sparked analyst speculation about a special dividend by the end of the year, but executives on Thursday's conference call did not offer any new guidance beyond reiterating the company's commitment to return excess cash to investors.

CBOE's adjusted financial results excluded a tax benefit of $7.7 million in the third quarter of 2012 and a tax charge of $4.2 million a year earlier.