FM: Seems like it’s more so now with day traders…
BB: It’s not even just day traders. We concentrate on getting people who own stocks or ETFs to learn how to use options to help calibrate their portfolios in terms of the risk profiles. So I’ve always looked at options as an adjunct to stock investing, not a standalone. [They] can be used as a standalone but there are so many people who own stocks out there in 401ks or IRAs where options are very appealing to fine-tune a portfolio.
With the CME, I did a tremendous amount of work in the creation of stock index futures as a credible portfolio management tool and lending credit to it; this was not just a speculative vehicle. And second I helped them get into the options business. Understanding that I came from a stock exchange where the old timers didn’t want to learn options, and here I go to a derivatives exchange and say, ‘hey, these are pretty smart derivatives traders,’ and yet the futures traders refused to embrace options. Like Yogi Berra said, it was like déjà vu all over again. Options add a level of complexity that a lot of old timers just refuse to embrace. We call that mental gear shifting.
The other thing I did at the Merc is try to bring some structure to the staff…again it had grown like Topsy and it needed to be more professional. I took great pride in that, because when I got there, and it was the typical futures exchange structure where the chairmen of the committees basically felt that the staff worked for them. My feeling was no, they worked for me, and if you have an issue with the staff you come to me. But historically, the members of the Merc and Chicago Board of Trade felt that the staff was their own direct employees. And that was very difficult for people to work in that environment.
FM: Now let’s go through some historical events and developments. Let’s start with cash settlement and its importance as far as indexation.
BB: To the best of my recollection, cash settlement came in the early 1980s. It first manifested itself in the creation of Eurodollar futures, which is interesting because it was based on Libor. When I got to the Merc, Eurodollar futures had just started trading. It was really small then; T-bill futures were much more active. But the Shad-Johnson [Accord] allowed cash settlement in securities-related products. Shad-Johnson basically divided up the world on equity products between futures and securities. And that happened right before I joined the Merc because the Shad Johnson bill, one signed into law, allowed the first trading of stock index futures. So cash settlement really preceded it.
Cash settlement really started in Australia, not in the U.S. So it wasn’t invented in the U.S. but certainly was taken to a high level of success because of Eurodollar futures and because of stock index futures, and then stock index options.
[It also helped] the whole issue of globalization and internationalization of these markets.… My first week at the Merc, Liffe (London International Financial Futures Exchange) had just opened — it was the first futures exchange outside the U.S. for financial products. CBOE created the first options exchange outside the U.S. in Amsterdam, which is still the home of the most vibrant equity options market in Europe. You could say it goes back to the 1600s, but it certainly goes back to the 1980s when the EOE first started. So the CME helped create LIFFE by giving advice to John Barkshire and his cronies; the CBOE helped create the EOE in Amsterdam.
FM: It’s interesting how much futures and options education of the world came from the U.S. —
BB: No, it came from Chicago.