INTERNATIONAL DEVELOPMENTS IN FUTURES AND OPTIONSHistory & the Road Ahead

LT Jay Killen 18 May 2011

INTRODUCTION

LT Jay Killen

Assistant Professor Of Naval Science

MBA Wanna-be

AGENDA

“Quick” History of Futures/Options in the U.S.

History of International Futures/Options

Key Differences

Recent, Current & Future Events

Many contemporary [nineteenth century] critics were suspicious of a form of business in which one man sold what he did not own to another who did not want it… Morton Rothstein (1966)

LEARNING OBJECTIVES

Have a basic understanding of the history of U.S. Futures/Options

Have a basic understanding of the History of International Futures/Options

Introduction to current and future plans concerning NYSE EuroNext

HISTORY OF U.S. FUTURES TRADING

Late 1840s/Early 1850s – Fungible standards developed

1948 – CBoT Established

1851 – First contact on corn written

1850s – Forward contracts for cotton in NY

1863 – CBoT Establishes first rules for trading forward contracts

HISTORY OF U.S. FUTURES TRADING

1865 – CBoT began transition to futures contracts

1867-1909 – Numerous attempts to “corner”

1867-1892 – Numerous anti-futures Bills/Law Suits

1870s – Organized cotton futures traded in NY

HISTORY OF U.S. FUTURES TRADING

1882 – Cotton futures traded in New Orleans

1884 – CBoT Clearinghouse established

1922 – Grain Futures Act establishes first federal control over futures trading

1936 – Commodity Exchange Act established the Commodity Exchange Authority (CEA)

1960s-1970 – Rapid growth in futures trading

HISTORY OF U.S. FUTURES TRADING

1972 – Currency futures introduced

1974 – Commodity Futures Trading Act establishes Commodity Futures Trading Commission (CFTC)

1975 – Interest rate futures introduced

1982 – Stock index futures

2007 – NYSE merges with EuroNext to form the first transcontinental futures & options exchange

HISTORY OF U.S. OPTIONS TRADING 1872 – Russell Sage sells first US Put/Call Options (OTC)

1973 – First U.S. Options exchange founded (Chicago Board Options Exchange)

1973 – Fischer Black & Myron Scholes publish research paper in the Journal of Political Economy (Black-Scholes Option Pricing Model)

1975 – SEC approves the Options Clearing Corporation

1975 – Philadelphia and American Stock Exchanges begin trading stock options

HISTORY OF U.S. OPTIONS TRADING

1976 – Pacific Stock Exchange begins trading stock options

1977 – SEC approves trading of “Put” options

1977 – SEC halts any further options expansion pending investigation

1980 – SEC completes review and authorizes resumption of option introductions

HISTORY OF U.S. OPTIONS TRADING

1980 – CBOE begins trading S&P 100 index option

1982 – CBoT offers OPTIONS on FUTURES

1985 – Options on Treasure securities introduced

1990 – Long-term Equity Anticipation Securities (LEAPS) introduced

HISTORY OF U.S. OPTIONS TRADING

1992 – Options Industry Council (OIC) introduced

2000 – International Securities Exchange (ISE) established as first all electronic U.S. options exchange

2001 – Options exchanges switch from fractions to decimals

2004 – Boston Options Exchange becomes U.S.’s second all-electronic options exchange

HISTORY OF INTERNATIONAL FUTURES TRADING

1616ish – First recorded “forward” contract for rice in Japan

1654ish – Traders had developed functioning market for “rice bills”

1650s – Trading house of Saburaemon Yodoya becomes primary site for rice bill trading

1688 – Japanese Government requests Rice traders move from Kitahama Road (Osaka) to Dojima to alleviate traffic congestion in the city

HISTORY OF INTERNATIONAL FUTURES TRADING

1705 – Japanese Government closes Yodoya’s business and confiscates his assets (futures illegal)

1730 – Japanese Government officially authorizes futures trading at Dojima

1730s – Dojima meets requirements to be considered “World’s First Organized Futures Market” ( Standard terms, tranferability, clearinghouse, etc...)

HISTORY OF INTERNATIONAL OPTIONS TRADING

332 BC – Thales options the use of Olive Presses (“Politics”)

1630s – “Tulip Mania” in Holland is first recorded mass trading of options

1733 – Options deemed illegal in London

1860 – Options legalized in London

DIFFERENCES BETWEEN U.S. AND INTERNATIONAL OPTIONS

Exercise Options

American – Exercised prior to or on expiration date

European – Exercised only on the expiration date

Bermuda/Atlantic – Exercised only on specific dates

DIFFERENCES BETWEEN U.S. AND INTERNATIONAL OPTIONS

Expiration/Maturity Date

American – Expire the 3rd Saturday of every month (closed for trading the Friday)

European – Expire Friday prior to 3rd Saturday (Closed for trading Thursday)

DIFFERENCES BETWEEN U.S. AND INTERNATIONAL OPTIONS

Valuation

American – No general formula Whaley, Binomial Options, etc…

European – Black-Scholes Model

RECENT/CURRENT HISTORY IN INTERNATIONAL FUTURES AND OPTIONS

1982 – London International Financial Futures Exchange (LIFFE) established by Sir Brian Williamson

1989 – Tokyo International Financial Futures Exchange (TIFFE) established

1990 - Deutsche Terminbörse (DTB) founded in Frankfurt (Electronic Exchange)

RECENT/CURRENT HISTORY IN INTERNATIONAL FUTURES AND OPTIONS

1993 – LIFFE Merges with London Traded Options Market and changes name to London International Financial Futures and Options Exchange

2000 – EuroNext formed with the merger of the Amsterdam, Brussels, and Paris Exchanges

2000 – LIFFE closes the last of its open outcry pits

2001 – LIFFE sells LIFFE.CONNECT to Tokyo Futures Exchange

RECENT HISTORY IN INTERNATIONALFUTURES AND OPTIONS

2002 – LIFFE acquired by EuroNext

2002 – Derivative arms of Amsterdam, Brussels, Lisbon and Paris Exchanges merged into EuroNext.LIFFE

2003 – LIFFE sells LIFFE.CONNECT to CBoT

2006 – NYSE & Deutsche Börse make a bid for EuroNext

RECENT/CURRENT HISTORY IN INTERNATIONAL FUTURES AND OPTIONS

2006 – Deutsche Börse drops bid removing the last major hurdle for NYSE

2007 – NYSE merges with EuroNext to form the first transcontinental futures & options exchange

2008 – Deutsche Börse began merger talks with NYSE EuroNext

2009 – Talks break down between Deutsche Börse and NYSE EuroNext

RECENT/CURRENT HISTORY IN INTERNATIONAL FUTURES AND OPTIONS

2010 - Deutsche Börse reenters talks to merge with NYSE EuroNext

2010 – NASDAQ pursues acquisition of NYSE EuroNext

2011 – NASDAQ drops bid to purchase Rival NYSE EuroNext

WHAT’S NEXT?

Continued movement away from open outcry trading U.S. – Physical commodities International – Energy/Oil

Deutsche Börse Urges Support for NYSE Deal Would create the world’s largest stock and

derivatives trading platform

MERGER TREND

SUMMARY

History of Futures/Options (US)

History of Futures/Options (International)

Key Differences

Recent/Future Events

REFERENCES http://eh.net/encyclopedia/article/Santos.futures

http://www.futures-advisor.com/beginners/history-futures-trading

http://olesiafx.com/economics/day-200811-03.html

http://www.optionetics.com/market/articles/7411

http://www.marketswiki.com/mwiki/CME_Group_History_Timeline

 http://www.optiontradingpedia.com/history_of_options_trading.htm

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http://tradersnarrative.wordpress.com/2011/02/09/exchange-consolidation-lse-tmx-and-deutsche-borse-nyse/

QUESTIONS?