Financial History 145 Spring 2023 - Page 24

Cboe Global Markets
The S & P 100 Index ( OEX ) options pit in 1984 ( left ) and the Cboe Volatility Index ( VIX ) options pit in 2006 ( right ), showing the change in technology on the Cboe trading floor .
Cboe Global Markets
Upon selecting a new underlying stock , Amex ’ s practice was to send a welcome letter to each company to inform corporate management of its intention to start options trading . Immediately upon receipt of the Amex letter , the Golden Nugget CEO contacted the exchange demanding that no options trading take place on its stock . The Amex respectfully refused the demand and Golden Nugget commenced a lawsuit in Nevada federal court .
Golden Nugget ’ s contention was not based on any violation of securities law , rather that Amex ’ s failure to secure the company ’ s consent before trading options on its stock constituted a misappropriation of Golden Nugget ’ s property and that it infringed the Golden Nugget trade-name which , in essence , constituted unfair competition . For more than four years , Golden Nugget ’ s suit against Amex and OCC wound its way through the federal courts . At the trial court level , Amex prevailed and , in September 1987 , about a month before the market crash , a federal Court of Appeals rejected Golden Nugget ’ s appeal , upholding the lower court ’ s decision .
The increase in options activity among retail investors brought more attention to the options departments at brokerage firms . During on-site sales practice examinations , regulators noted a rise in customer options complaints and arbitration filings and the SEC was troubled
by certain questionable trading activity on the trading floors that attempted to influence volume levels in multiply-traded options . These concerns led the SEC in October 1977 to declare a moratorium on any further expansion of options trading pending the findings of a broad study of the listed options markets . The SEC study lasted more than a year and concluded with the issuance of more than 80 recommendations ranging on issues of options sales practices , floor trading and surveillance , registration and licensing of sales personnel , advertising and net capital requirements , among others .
To address these recommendations , the exchanges formed an Options Task Force composed of representatives from each options exchange , the NASD and the member firm community . The Task Force proposed numerous new rules and procedures that ultimately satisfied the SEC , which lifted the moratorium in 1980 and effectively removed exchange-listed options trading as a “ pilot program .”
Some of the early post-moratorium actions taken by the SEC included a phase-in of puts trading so every outstanding option class had both puts and calls available ; the adoption of an Allocation Plan addressing how new underlying stocks were selected and traded among the options exchanges ; and consideration of several new products for trading options on interest rate securities , foreign currencies , domestic and foreign stock indices and market volatility .
A long-held concern of the SEC in allowing for the expansion of listed options trading was the need to assure that industry personnel were well informed and educated about options products . To address this , exchanges held education seminars , workshops and other instructional efforts directed at both floor trading personnel and upstairs sales representatives . Industry-wide licensing exams for registered and supervisory personnel were expanded to include options , and brokerage firms were further required to identify and qualify those personnel who oversaw customer options account approvals , as well as any other options-related businesses in which a firm might engage . And , to assist in educating individual investors about the responsible uses , benefits and risks of exchange-listed options , OCC created The Options Industry Council to provide free seminars , webinars and other materials .
Academic Curiosity
Appealing not only to investors , options have long been an attractive area for academic study . Possibly the best-known academic effort which , coincidentally , was published just prior to the time Cboe
22 FINANCIAL HISTORY | Spring 2023 | www . MoAF . org