This afternoon the Chicago Board Options Exchange teamed up with Barron’s to host a “40, 30, 20” panel discussion on options innovation. “40, 30, 20” refers to three significant milestones in the history of CBOE – 40 years ago CBOE was established as the first listed options exchange in the US, 30 years ago index option trading commenced at CBOE, and 20 years ago the CBOE Volatility Index (VIX) was introduced.
The panel was moderated by Ed Finn – Barron’s Editor and President
The panelists were Buzz Gregory, Equity Derivatives Strategist at Goldman Sachs, Larry McMillan, Founder of the OptionStrategist.com and President of McMillan Analysis, Thomas Peterffy, Chairman and CEO of Interactive Brokers, Myron Scholes, Professor of Finance Emeritus at the Stanford Graduate School of Business, and Bill Brodsky Chairman and CEO of CBOE.
The discussion was loosely divided into four sections – the beginning of option trading, the introduction of index options, the introduction of VIX, and looking forward. Highlights from each section appear below –
The Beginning – 40 Years Ago
Myron Scholes was asked about his interest in option pricing. He joked he felt is was the best way to win a Nobel Prize, but then explained that He was fascinated by the pricing of options. When at MIT he first considered pricing options and noted that it was easy to get a terminal value, but not a present value of on option contract. Scholes also notes that the Black Scholes paper was rejected several times before being published.
Bill Brodsky pointed out that before listed options trading Wall Street people were either focusing on the stock or bond markets. There were very few option traders (called put – call traders at the time). Initially the bulk of put-call dealers dismissed the idea of an exchange.
Thomas Peterffy was asked about being the first market maker at Amex to implement electronic trading and tie into quote systems. He noted that he had a leg up on the competition until electronic trading fully caught on.
Larry McMillan was asked about the liquidity of the markets in the early days and he noted that liquidity was fine, that at times options appeared to be mispriced and he would take advantage of these mis-pricings.
Launch of Index Options Trading – 30 Years Ago
Bill Brodsky talked about creating of S&P futures at CME which then led to the idea of creating index option contracts. Originally CBOE created an index of 100 of the biggest S&P 500 stocks that became the S&P 100 (OEX). Over time volume gravitated from the OEX to S&P 500 Index option arena (SPX).
Buzz Gregory noted CBOE strategy indexes, such as BXM and PUT, demonstrate the value of options as risk management tools.
Ed Finn chimed in and shared that Dow Jones was reluctant to license the Dow Jones Industrial Average to trading vehicles and the result may have been the S&P 500 dominance of this area.
Creation of VIX – 20 Years Ago
It was noted that Steven Sears was responsible for giving VIX the nickname the “Fear Gauge”
Buzz Gregory kicked off the VIX discussion by saying that the introduction of VIX futures and VIX options expanded the number of market participants that wanted exposure to volatility. He also noted that discussions about SPX trading are often less dynamic than discussions he has with clients regarding VIX exposure.
The Next 40 Years
Bill Brodsky discussed the evolution of VIX trading as a model of how new products may be successfully rolled out in the future. He discussed the CBOE decision to develop the CBOE Futures Exchange from the ground up, introduce futures trading and then follow up with index options.
Thomas Peterffy was asked about the evolution of financial markets and he feels regulations may steer the future. That there may be the emergence of a global financial center in the future that properly balances regulation with free markets.
Myron Scholes noted that in order to predict the future of markets one should focus on changes in population, technology, scarcity, and politics,
Buzz Gregory said that a continuing need in the future will be proper education on using financial tools for investors. Ed Finn followed on that thought saying that it seems each market set back (2008 being the last one) is followed by a surge in investors desiring education.
Larry McMillan finished the discussion about the future direction of the markets by agreeing about the need for education and also stating that he would like to see a viable variance derivative market.