Cboe Global Markets

By Howard Baker

Fifty years ago , on April 26 , 1973 , the Chicago Board Options Exchange ( Cboe ) opened its doors for business , offering investors , for the first time , standardized stock options contracts traded on a national securities exchange . These contracts , covering call options on 16 stocks , introduced the investment world to a number of innovations , including standardized terms and conditions , next-day settlement and an affiliated clearinghouse which issued and guaranteed the performance of all contracts traded .

There are two types of stock options : puts and calls . A call option entitles the holder to buy a fixed number of shares of an underlying security at a stated price on or before a fixed expiration date . A put option entitles the holder to sell a fixed number of shares of an underlying security at a stated price on or before a fixed expiration date . Options are uniquely flexible ( versatile ) financial instruments with a variety of uses . As instruments of risk transfer , they can be used to increase an investor ’ s stock market exposure with limited , predetermined risk , or to reduce

First day of trading at the Chicago Board Options Exchange ( Cboe ), April 26 , 1973 . the financial market risk an investor might have by holding an individual stock or portfolio of stocks .

Before Cboe ’ s launch , options trading was conducted by telephone in the overthe-counter ( OTC ) market through put and call brokers . Historically , the conventional OTC options market was small , so it was not surprising that many seasoned Wall Streeters were highly skeptical of Cboe ’ s chances for survival . Further , industry conditions at the time of Cboe ’ s debut could hardly have been worse — the stock market was down , trading volume was low and many brokerage firms were consolidating or terminating operations .

OTC options trading in the United States dates back to the late 18th century . During the roaring bull market of the 1920s , options contributed to some serious abuses in the financial markets . Public concern about the contributory role of options in a national financial collapse led to a Congressional probe and the introduction of legislation banning all options trading nationwide . In response , a vigorous lobbying effort educated legislators about the legitimate hedging functions of options successfully avoided an options ban in the Securities and Exchange Act of 1934 . Instead , the law authorized the newly formed Securities and Exchange Commission ( SEC ) to regulate options trading and , at the SEC ’ s urging , the Put and Call Brokers Association was formed as a self-regulatory body to oversee OTC options trading .

Cboe ’ s Beginnings

Cboe ’ s roots trace back to the late 1960s to the Chicago Board of Trade ( CBOT ), at the time the country ’ s largest futures market primarily dealing in agricultural commodities . To mitigate the ebbs and flows in its grain trading pits , CBOT undertook an in-house effort to find a new product to trade . Ultimately , it zeroed in on the conventional OTC put and call stock options market . For the better part of the ensuing five years , CBOT doggedly pursued a plan to create a listed options market aided by a blue-ribbon advisory committee representing the financial , academic and institutional investor communities . They held numerous discussions and negotiations with regulators , including the Federal Reserve Board , the Commodity Exchange Authority ( CEA ), state securities commissioners and the SEC , who were concerned as to the impact a new options market might have on the integrity of the existing financial system .

Once it became clear that the SEC would be Cboe ’ s prime regulator , CBOT ’ s governing board , which had always been uncomfortable with the prospect of possibly having two federal regulators ( the CEA and SEC ) overseeing its activities , decided to spin-off both the Cboe and the Cboe Clearing Corporation as independent entities . As part of the terms of the spin-off , existing CBOT members were granted continued trading rights and privileges on the Cboe while trading

20 FINANCIAL HISTORY | Spring 2023 | www . MoAF . org