Securities and Exchange Commission Historical Society

The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

Governing a New Market

Pilot Operation

"To the extent possible the pilot program should be designed to serve as a complete test of the feasibility of a full scale market and of the Board's capacity to provide adequate regulation."

- October 13, 1971 Letter from Irving M. Pollack, SEC Division of Trading and Markets to Milton H. Cohen, Schiff Hardin Waite Dorschel & Britton concerning Chicago Board of Trade's proposed options exchange

In the 1960s, the grain futures business was flat, so the 120-year-old Chicago Board of Trade (CBOT) began looking for a new line of business. One opportunity appeared to be in the old "put and call" market. A few brokers had always been willing to write contracts to sell (put) or buy (call) equities at a specific time at a specific price, but most investors shied away, since there was no continuous market.

By 1969, the CBOT had decided to create a marketplace for what would henceforth be called "exchange traded options."  The SEC approved this "pilot program" in 1971 and two years later registered the CBOE as a national securities exchange, making it the first options exchange to become a self-regulatory organization under the public/private partnership model established in 1934.71

The architect of the exchange was Joseph Sullivan, a former journalist who had gone to work for the CBOT. He created the organization along mostly traditional lines. The CBOE was owned by its members, about 350 at first, although an agreement with the CBOT granted trading privileges to some 150 of its members. Like other self-regulatory organizations, the CBOE was committed to representative governance. Policy was set by a member-elected board of directors, and board committees oversaw administrative, disciplinary and government functions. A staff led by Sullivan monitored compliance, conducted examinations of member firms, and evaluated market maker performance.72

The trading floor, built in the former CBOT smoking lounge, was more innovative. There were no broker-dealers. "Board brokers" kept limit order books, while market makers maintained a fair and orderly market by trading for their own account. But in contrast to those at the NYSE, CBOE market makers did not specialize. Instead, they competed to trade a number of options, an arrangement intended to tighten spreads and increase liquidity. For the pilot program, the SEC limited the CBOE to offering sixteen standardized call option contracts. Purchasers got a right to buy equities in 100-share increments at a point in time three, six, or nine months distant at a fixed "striking price."73

By the summer of 1973, the CBOE was doing six times the volume of the old put and call business, spurring others to get into options. In 1975, the AMEX and the Philadelphia Exchange both opened options floors; the Pacific and Midwest Stock Exchanges followed in 1976.74

Market innovation accompanied early growth. Veteran put and call traders relied mostly on intuition and experience. But just months after the opening of the CBOE, economists Fischer Black and Myron Scholes published "The Pricing of Options and Corporate Liabilities," which provided a mathematical model for judging the performance of options. Soon the veterans gave way to younger traders wielding carefully-calibrated mathematical models. In 1975, "Black-Scholes" was officially adopted by the CBOE for computerized price reporting.75  That same year, the CBOE moved into new space with a 20,000-square-foot trading floor and turned its attention to the trading of put options, obtaining SEC permission to launch five of them in June 1977.76

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(71.) Barron's, September 14, 1992; October 11, 1971 Memo from Paul F. McGuire, Special Securities Committee to the Board of Directors, Chicago Board of Trade on formation of an options exchange; February 2 1973 SEC News Digest

(72.) CBOE Annual Report, 1974; CBOE Annual Report 1973.

(73.) New York Times, April 27, 1973; CBOE Annual Report, 1973; Gail Osten, "Three Decades of Options and the World Is A-Changin'," Stocks, Futures and Options Magazine,April 2003; 1973 Chicago Board of Trade:  Summary of Proposed Options Exchange Bylaws & Rules Regarding Membership Qualifications and Requirements for Various Forms of Participation

(74.) September 27, 1973 Letter from Paul Kolton, American Stock Exchange, Inc. to Lee Pickard, Director, SEC Division of Market Regulation on options trading; December 22, 1978 Report of the SEC's Special Study of the Options Market, 3.

(75.) Osten, "Three Decades of Options"; Barron's, May 12, 2008; Fischer Black and Myron Scholes, "The Pricing of Options and Corporate Liabilities," Journal of Political Economy 81, no. 3. (1973): 637-54.

(76.) CBOE Annual Report, 1975; December 22, 1976 Draft letter from Chicago Board Options Exchange to SEC Commission on CBOE's preparation for put trading; Chicago Tribune, February 6, 1978.

Related Museum Resources


October 11, 1971
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
October 13, 1971
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
October 14, 1971
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
February 2, 1973
image pdf (Government Records)
September 27, 1973
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 16, 1974
image pdf (Courtesy of the Chicago Board Options Exchange Archives)


(Courtesy of Chicago Board Options Exchange )
(Courtesy of Chicago Board Options Exchange )

Oral Histories

08 June 2007

Donald Calvin

04 May 2009

Nelson Kibler

Film, Radio And Television


"Founders: Chicago Board Options Exchange - 25 Years of Options"

courtesy of the Chicago Board Options Exchange

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