Bill Brodsky, executive chairman of the Chicago Board Options Exchange (CBOE), has been around. As a young securities lawyer in New York, he joined the American Stock Exchange and helped launch its options products; as CEO and president of the Chicago Mercantile Exchange, he oversaw the start of Globex; and as head of CBOE, he saw the exchange demutualized and the launch of the VIX product line — one of the most successful contracts in modern history. In May, Brodsky left his post as CEO and assumed the role of executive chairman, where he’ll serve over the next year. As someone who has been involved in all aspects of the derivatives business, we wanted to get his candid look back to see how the financial world has changed.
Futures Magazine: What do you see as a game changer for both stocks and derivatives?
Bill Brodsky: One of the prime reasons the CME had asked me to come to Chicago [was] they had just signed the contract with [Standard & Poor’s] to trade stock index futures. I had spent my career up to that point on the stock side, a little on the options side as well, but I understood the stock market, and to their credit they understood that I knew the stock market and they didn’t. And the negotiations actually started exactly when they signed the contract with S&P. It was not a coincidence.
When I think back on how important stock index futures were…it wasn’t that they just created a very efficient vehicle for accessing or hedging in the stock market, but it also was the beginning of the trend toward tradable indexes, and there is no doubt that indexation has been an enormous part of the way the equity markets in particular have evolved. All you have to look at is the growth of stock index futures and stock index options.
But then the automation [of the market] allowed for what we used to call baskets of stocks, which then became portfolios of stocks, which then became the ETFs [exchange-traded funds]. Look at the evolution of equity markets and how they traded and how investors used [them]. You can see the mutual fund companies that embraced indexation and those that didn’t — there’s almost a great divide in terms of people just swarming to ETFs. But ETFs don’t hang there alone because there’s what preceded them, stock index futures and stock index options. So I think indexation is an amazingly powerful force in the investment world, but in the equity world in particular.
And it continues. We have not seen the peaking of the growth. [Just] look at the brokerage firms, the Schwab’s and Vanguard and Blackrock, and through Fidelity, [they are] making these vehicles accessible to individuals and institutions.
FM: That has expanded the market, right?
BB: Not only expands the market, but it’s part of the whole issue of active vs. passive management. That touches everyone, whether it’s a 401k plan or a pension plan, essentially can the active manager outperform the passive fund?
So what we began here in Chicago — stock index futures and a year later the CBOE created the first stock index options — we helped facilitate what really has become a revolution in finance.