"The CBOE faces an unusually tough management challenge. It must deal with a complex product line and complex customer relations. It must deal with many constituencies, with little direct control over them. And it must deal with these in a cultural environment which is, of its nature, short term, transactional, and crisis-oriented."
- October 11, 1984 Report of the Organizational Task Force, Chicago Board Options Exchange
The hiring of Paine Webber veteran Walter Auch as CEO in 1979 marked a turning point for the CBOE. No longer a member-driven experiment, the CBOE became a professional institution. New public directors joined the CBOE board, and Pacific Exchange veteran Charles Henry came on as chief operating officer to run the floor.
By then, the SEC Options Study had been completed, and of the five major exchanges, the CBOE had probably fared best. The SEC nevertheless called on the CBOE to upgrade record-keeping, exams and member oversight. These self-regulatory projects were more easily accomplished than getting the members behind changes necessary to keep the CBOE competitive.82
In 1979, a year after another market rally had caught the floor undermanned and overexposed, the CBOE finally dismantled the board broker system. But the competing market maker system remained, and it was costly and difficult to police. It was also singularly ineffective. CBOE market makers were not required, as specialists were, to support any particular option. When they abandoned cold options for hot ones, a proportion of CBOE options—up to a third—languished in inactivity. This gave the American Stock Exchange, with its traditional specialists, an advantage.
Technology also created challenges. The CBOE had implemented automated order routing in 1979. Automated execution, developed at great expense, was ready for deployment in 1984, but members restricted it only to select options. As was the case at NYSE, exchange floor members, in controlling SRO governance, captured the regulatory apparatus in order to benefit themselves at the expense of customers.83
There was some good news. In 1980 the Midwest Stock Exchange sold its options business to the CBOE, giving it 120 stocks in all. The same year, the SEC lifted the moratorium, but that turned out to be a mixed blessing. The moratorium had helped preserve the CBOE's dominant position. The CBOE now faced new competition along with a deep recession.84
(82.) CBOE Annual Report, 1978; December 22, 1978 Report of the SEC's Special Study of the Options Market, 55-56, 490.
(83.) Chicago Tribune, April 11, 1979, July 28, 1978, and August 3, 1985.
(84.) June 1, 1979 Letter from Robert J. Birnbaum, American Stock Exchange, to SEC Chairman Harold M. Williams, protesting SEC approval of the expansion of the Chicago Board Options Exchange; June 8, 1981 The Options Markets Come of Age: Their Past, Present and Future - Address by SEC Commissioner Barbara S. Thomas to the American Stock Exchange.
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