FM: In each of the areas, with securities, with futures, with options, what do you see as your greatest accomplishment, or the exchanges’ greatest accomplishments?
BB: You can’t ignore that one of the greatest things that has been brought to finance in [this] lifetime was the creation of CBOE itself, which truthfully was a creation of the Chicago Board of Trade (CBOT) and a testament to the futures structure that existed, and how it was transplanted or reproduced in some fashion in the securities model. What the CBOT created in the CBOE was a way of standardizing options that had existed for hundreds of years, and created a secondary market as a result of the standardization. And it created next day settlement, which did not exist in stocks; it created certificateless trading that didn’t exist in stocks; and it created a clearinghouse in derivative contracts that did not exist in stocks, which ultimately resulted in the Options Clearing Corporation. So that was an enormous innovation.
The CBOE has been what I call a cauldron of innovation in creating so many different things: How to create stock index options, how to create long term [options], what we call Leaps, and probably one of the most dynamic and exciting innovations was the creation of volatility products (of which I’m very, very proud). One of the things that makes CBOE special is not only did we figure out a way to quantify volatility through the index, which is 20 years old this year, but then we [started trading them]. And when we started trading volatility futures, we could have gone to another futures exchange and said please do it for us, but instead we decided to build our own futures exchange, which I submit is probably the most dynamic futures contract created anywhere in the world in the last 25 or more years.
The other thing I’m most proud of is being able to create CBOE as an independent entity. Until three years ago, we were joined at the hip, although I think it was more shackled at the ankles, to the Board of Trade. It was the most vexing issue that we had to deal with, and unfortunately the brilliance of the creation by the Board of Trade was overwhelmed by the difficulty the two memberships had almost from day one...the structure was impossible. From the day I got here it was impossible. [As] other exchanges wanted to demutualize, it became evident to us we were stuck until we could settle [the dual membership issue]. We ultimately [worked out a] financial settlement with the Board of Trade members (not the Board of Trade).
How do you deal with that enormous pool of people and try to come to some solutions? It took years to do that. And of course once we did that, we were able to move on to our IPO. And I’m happy to tell you that here we are 35 months later, and I’m incredibly proud of our team and what we created, and our financial success, rewarding investors, the independence of CBOE as an entity. And the fact that in this post-financial crisis environment, we’ve been able to grow in the face of very daunting challenges in terms of volume and investor participation, and other things.
FM: Discuss your time at Amex and CME...
BB: I helped bring options onto the Amex. Forty years ago this month I authored an article on this exchange in Chicago. I had never visited Chicago, and I wrote an article — while I was still at a brokerage firm — about the rules of the CBOE because I had just bought a seat on the CBOE on behalf of my firm...So my relationship with the CBOE goes back literally 40 years…. who would have dreamt 40 years ago not only would I be living in Chicago, I would become CEO and chairman of an exchange that I only really wrote about as a lawyer because I found it interesting.
It’s interesting because of the three reasons [the CME was] interested in hiring me: [First] was my knowledge of the stock market, second was my knowledge of options, because they had just gotten the signal that the CFTC (Commodity Futures Trading Commission) was going to allow them to trade options on futures, and of course no one at the CME knew anything about options, and third was to help manage the exchange that was growing like Topsy.
FM: You were there during the launch of Globex?
BB: Oh, well before that. The CME embraced globalization very early, and was very prescient in creating Globex — and the dream is still being realized in terms of how they can use that system — but what was interesting and frustrating to me was notwithstanding the fact they were avant garde in 24 hours trading, or at least after hours trading (because remember Globex was always just after hours), they refused to embrace technology on the trading floor. The CBOE already was using handheld terminals [while] the CME and CBOT refused.
Here [we were] in the Chicago community where, in fact, members were coming across the bridge to the CBOE and going from throwing papers on the floor at the Board of Trade to using handhelds at the CBOE. It was quite a stark contrast.
So the CME, to its credit, was way ahead of itself in one area but absolutely [behind in on-floor] technology. But the CME and CBOT didn’t have the competition the CBOE had…that’s really what it was about. CBOE was competing with other [options] exchanges and one way to compete was to use technology.
One of the great things the CBOE did years ago was called RAEs — retail automated execution system — [not because of competition], but to deal with heavy volume. One of the other big differences between CBOE and [the futures exchanges] was the large [number] of retail investors, which has only continued to grow. Both groups of exchanges have always done a very good job in educating investors, but the participation is much more retail oriented in options than the futures business.