CBOE Fetes 40 Years, Brodsky

Terry Flanagan

CBOE Holdings’ annual shareholder meeting held this week was more eventful than usual, as it capped a month-long celebration of Chicago Board Options Exchange’s 40th anniversary and coincided with the planned stepping down of long-time chief executive William Brodsky.

CBOE hosted a panel discussion on the history and future of equity options, its 30 years of creating index products, and 20 years of the CBOE Volatility Index, or VIX.

Members, board directors, and staff acknowledged Brodsky’s achievements in his 16-1/2-year tenure, and Brodsky turned over the reins of the exchange operator to Ed Tilly and shifted into his new role as executive chairman of the board.

CBOE Holdings had more than one billion contracts traded on its exchanges in each of the past five years, and 2012 saw record revenue, operating margins, and earnings per share, Brodsky noted. Shareholders were also reminded of the company’s “pristine, debt-free balance sheet.”

During the shareholder Q&A, there was a question about the firm’s $200 million cash balance. Chief financial officer Alan Dean responded the monies are there to be sure the business is properly funded, and any excess would be returned to shareholders in the form of dividends and stock buybacks.

Mr. Brodsky led the CBOE through what some consider the most difficult years of its four decades when he took the corner office in 1997. Soon after, it was necessary to convert from a member-owned open outcry model to an increasingly electronic marketplace by creating a hybrid system merging the live trading with the growing screen-based markets to compete and survive in a consolidating, competitive industry.

Brodsky led CBOE through its demutualization phase, positioning the exchange with a bottom line that would set the stage for its 2010 initial public offering. CBOE also extended its exclusive licensing relationship with Standard & Poor’s and Dow Jones indexes under Brodsky’s watch, and the CEO represented CBOE and the industry in the chambers of politics and government.

In its first year, 1973, CBOE listed call options on 16 stocks, and volume totaled 1.1 million. Puts were added in 1977. The exchange created its own CBOE 100 Index with the contract acronym OEX in 1983; it was the first cash-settled options product.

In his penultimate day as CEO, Brodsky and four other options veterans spoke on a panel about the history of listed options, experiences as the first proponents of CBOE’s contracts including the indexes, and to discuss the future.

Thomas Peterffy, chief executive of Interactive Brokers, was one of the earliest electronic traders and beginning in 1969, created and managed computerized trading systems in commodity markets that he adapted to options trading. He touched on topics such as the value of a millisecond to a trader, exchange fragmentation, and the role of market makers.

Peterffy suspects that some U.S. professional traders will become concerned about free market pricing and look across borders for regimes with a strong financial and legal structure but less cumbersome regulation. This may be in London or Singapore, he said.

Goldman Sachs Equity Derivatives Strategist Buzz Gregory said education will continue to enhance the U.S. market leadership in options by helping investors navigate market cycles.

Nobel laureate Myron Scholes agreed with Peterffy and cautioned about ever-growing regulatory pressures. He noted a huge home-country bias in international investing and said he continues to study why clients invest in the assets and markets that they do.

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