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August 17, 2011

Birth of a Market

By Peter Chapman

It all began with a slow grain futures market. In 1968, with surpluses and government price supports sapping the life out of the grain futures pits, board members at the Chicago Board of Trade were casting about for new things to trade. They charged Eddie O'Connor, a successful futures trader and exchange director, to come up with something.

After reading an article in Institutional Investor, O'Connor, who died in January, decided that something was stock options. Up to then, options were traded over the counter in New York in relative obscurity by put and call dealers. These men supported the retail stockbrokers, bringing together buyers and sellers of puts and calls in expensive trades that could sometimes take days to complete.

For five years, O'Connor, considered the godfather of the modern day options industry, collaborated with CBOT executive Joseph Sullivan and Schiff Hardin attorney Milton Cohen to make the idea of an options exchange a reality. They got little help. In their endeavors they faced off against antagonistic CBOT members, dismissive New York City stockbrokers and a reluctant Securities and Exchange Commission. In the end, of course, they triumphed, and the Chicago Board Options Exchange was born. Sullivan became its first president in 1972. O'Connor did the first trade in 1973.

The story of the origins of the CBOE is told in Emily Lambert's engaging new book "The Futures." Although most of the book covers the development of Chicago's futures industry, Lambert, a reporter with Forbes, devotes a chapter to the CBOE's beginnings. It is an informative and entertaining tale that should appeal to anyone interested in the roots of the options industry.


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