02.22.2013
By Terry Flanagan

Lifetime Achievement Award

A Chicago exchange legend will start to ride off into the sunset this year.

In May, Chicago Board Options Exchange Chief Executive Bill Brodsky will step down from day-to-day leadership of the largest U.S. options exchange in May and move into the role of executive chairman. CBOE chief operating officer Ed Tilly will ascend to CEO.

Brodsky, 69 , has worked in the exchange sector for 39 years and in the securities industry for 45 years, dating back to when Lyndon Johnson was U.S. President. When Brodsky joined the New York-based American Stock Exchange in 1974, the Dow Jones Industrial Average was around 500 and floor based trading ruled the day.

“It has been an amazing period, because so much has changed,” Brodsky told Markets Media in a Jan. 16 interview. “The one constant I find in the business is change.”

Brodsky became head of Amex’s options trading in 1976. Average daily options volume in the U.S. was 128,000 in 1976, less the 1% of the 15.9 million daily volume in 2012, according to industry group OCC. “Helping the American Stock Exchange get into the options business was very important,” Brodsky said. “Trying to make options a legitimate investment vehicle was a big hurdle in those days.”

“After almost nine years at the Amex, I was lured to Chicago to become COO of the (Chicago Mercantile Exchange), then in 1985 I became CEO,” Brodsky said. “One of the most important things I did at the CME was help establish stock-index futures, which really helped create not only the use of equity derivatives in a broad sense, but also helped make indexation a market vehicle, or tool. So well before there were ETFs, indexation itself was a new concept, and stock-index futures helped that.”

“The stock-market crash of October 1987, in which the Dow Jones declined 23% in one day, represented a challenge for the futures sector in that some observers blamed the swoon on program trading driven by the relationship between equity and futures prices. “There was the whole issue of whether futures were a positive force in the market,” Brodsky recounted. “What evolved from it was the fact that the markets
in Chicago and New York were inextricably tied together, which comes up time and time again, for example as recently as the ‘flash crash’” of May 2010.

After almost 15 years at the CME, Brodsky moved across the street to CBOE, where he has been chief executive and chairman since 1997. “I was very excited to be back in the options business and part of the securities industry,” Brodsky said.

“At the CBOE we have had many challenges over the past 16 years, one of which was trying to free the CBOE from the structure that the Board of Trade had created 40 years ago, and how we become independent of the Board of Trade so we could have our own IPO,” Brodsky continued. “The other biggest challenge at the CBOE was taking the membership and the floor-based trading system, in the face of automation from others, and creating what was the world’s first hybrid trading system. I’m very proud to say that we were successful in doing that.”

CBOE Holdings went public in June 2010, raising $339 million and valuing the company at more than $3 billion; on the day of the IPO, Brodsky was joined on the trading floor by Illinois Governor Pat Quinn and Richard Daley, then the mayor of Chicago.

CBOE shares have gained only modestly, from $29 at the IPO to about $33 as of January 2013, as equity and options exchanges have struggled with tepid volumes and increased competition. Many market participants and exchange observers say CBOE is a prime acquisition candidate for a larger exchange operator, but Brodsky has said the company can succeed independently.

VIX Era

Thee rise of the CBOE Volatility Index is arguably the most significant corporate development under Brodsky’s watch. Introduced in 1993 by Duke University finance professor, usage of so-called ‘fear gauge’ took off after the methodology was revised in 2003, and the CBOE product represents the gold standard in recent exchange innovation.

“Probably the most exciting recent development was creating volatility as not only an asset class, but also as a tradable instrument,” Brodsky said. “I believe we’re still in the very early stages of growth in that area.”

“We first had to figure how how to trade it, then what to trade,” Brodsky explained. “Then, we figured out we needed to trade volatility futures before we could trade volatility options, so we had to either create a futures exchange or go out and team up with someone else. I’m very comfortable we made the right decision in creating our own futures exchange.”

“It has been an amazing period, because so much has changed. The one constant I find in the business is change.”

The emergence of VIX options created essentially a cottage industry of other securities, not unlike how Apple devices have given rise to many supporting products. “What it has done in terms of creating (exchange-traded notes) and other instruments is nothing short of breathtaking,” Brodsky said.

Brodsky, who started his career as a securities attorney, is a member of the Federal Reserve Bank of New York’s International Advisory Committee, and the Council on Foreign Relations in New York City. He was the first derivatives-exchange leader to be chairman of the World Federation of Exchanges, which he was in 2009 and 2010, and he is also the former chairman of the International Options Markets Association.

Brodsky’s outside-the-office activities underscore his career-long commitment to help move the broader industry forward. “The way I’ve operated is that you more than just do your job of helping the exchange operate successfully—there’s a bigger picture, things like regulatory reform, tax policy, and market structure.”

“I’ve had the background from a stock exchange, a futures exchange and an options exchange, so I can see the whole picture,” he continued. “I can go to Washington and really be an advocate for the whole industry. I’ve tried to do that from the very beginning.”

Brodsky plans to be executive chairman at CBOE for at least a year starting in May. He has no definite plans for retirement other than spending more time with his three sons, who each work in finance-related jobs, and continue to serve as chair of the Board of Directors of Northwestern Memorial Hospital, the largest health facility in Chicago.

“I have been so fully engaged in my work for the last 45 years that I’ve never had a situation where I wake up and say what am I going to do today? I don’t think that’s going to happen too soon, though,” Brodsky said. “I have lots of things I want to do. Right now I really am focusing on having a very smooth transition of the CEO role at CBOE, and then I’ll start assessing the situation going forward.”

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