Securities and Exchange Commission Historical Society

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

Governing a New Market

Oversight

"Because the member firm has first-line supervisory responsibility for its options activities, the new rules governing member firm internal supervisory controls are perhaps the most important aspect of this enhanced self-regulatory system. I believe that most sales practice abuses can be prevented through effective supervisory controls which have the demonstrated support of top management."

- September 16, 1980 "Regulation and Expansion of Options Markets" — Address by SEC Commissioner John R. Evans to The "New" Stock Options Market Conference

Establishing a strong market surveillance program—which the SEC held to be a responsibility of every exchange SRO—for an entirely new market was a big challenge. Information was key, and the CBOE met a high standard from the start with automated reporting on a next-day basis of trading information, including type of account, buying and selling brokers, clearing firms, transaction times and price information. Such information enabled CBOE officials in 1975 to uncover "tape racing" in which options traders utilized NYSE information obtained prior to public reporting. The CBOE put much effort into a study and a rule proposal, but the SEC opted to require timelier price reporting from the NYSE instead.77

Another of the CBOE's self-regulatory responsibilities was conducting member firm oversight. The exchange developed systems that enabled it to identify such problems as missing paperwork and excessive transactions. In 1976 the CBOE touched off the Marcus Schloss case after discovering that the firm's specialist had been providing kickbacks to another market maker.78

As with other SROs, rule infractions by members were handled through a committee system. At the CBOE, a permanent committee consisting of floor and non-floor members, as well as public representatives, reviewed cases developed by staff. If the committee found cause, it drew up charges and—after an opportunity for a hearing—sanctioned violations through penalties ranging from censure and fines to suspension and expulsion. As the SEC later attested, the CBOE was particularly effective during these early years in using the disciplinary process "to establish ethical and legal guides for the conduct of membership."79

That level of confidence on the part of the SEC took time to develop. In July 1977, concerned about unexpectedly rapid growth and worried about "the appearance of abuses," the SEC imposed a moratorium on any further expansion of the options industry and launched a review of the market, focusing on SRO surveillance and rules. Sullivan and the CBOE made good on a pledge to work closely with the SEC.80

Joseph Sullivan probably found it easier working with the regulators than with the floor members. By 1977, slackening growth and increasing competition had thrown a cloud over the CBOE. The system had been swamped during two mid-1970s bull markets. It was evident that the board broker system was too expensive to be supported by the CBOE. Nevertheless, restructuring initiatives were voted down by members intent on preserving the status quo, and escalating tensions between the floor and the staff were not relieved until a salaried CEO was hired and Sullivan stepped down.81

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Related Museum Resources

Papers

March 2, 1976
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
April 29, 1976
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
July 8, 1976
document pdf (Courtesy of the estate of John Evans)
October 12, 1976
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
November 16, 1976
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
December 3, 1976
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
December 22, 1976
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
December 27, 1976
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
January 4, 1977
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
January 5, 1977
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 1, 1977
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
August 10, 1977
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
October 6, 1977
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 20, 1977
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
October 27, 1977
transcript pdf (Courtesy of the Chicago Board Options Exchange Archives)
June 22, 1978
image pdf (Courtesy of the National Archives and Records Administration)
September 1978
image pdf (Courtesy of the Chicago Board Options Exchange Archives)
October 27, 1978
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 10, 1978
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
December 22, 1978
Report of the SEC's Special Study of the Options Market

(Courtesy of Stuart Kaswell)

February 14, 1979
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 16, 1980
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

Oral Histories

05 January 2010

William Brodsky

16 April 2009

Lee Pickard

19 January 2006

Harold Williams

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