I NTERNATIONAL D EVELOPMENTS IN F UTURES AND O PTIONS History & the Road Ahead LT Jay Killen18 May 2011

I NTRODUCTION  LT Jay Killen  Assistant Professor Of Naval Science  MBA Wanna-be

A GENDA  “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)

L EARNING O BJECTIVES  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

H ISTORY OF U.S. F UTURES T RADING  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

H ISTORY OF U.S. F UTURES T RADING  1865 – CBoT began transition to futures contracts  – Numerous attempts to “corner”  – Numerous anti-futures Bills/Law Suits  1870s – Organized cotton futures traded in NY

H ISTORY OF U.S. F UTURES T RADING  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

H ISTORY OF U.S. F UTURES T RADING  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

H ISTORY OF U.S. O PTIONS T RADING  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

H ISTORY OF U.S. O PTIONS T RADING  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

H ISTORY OF U.S. O PTIONS T RADING  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

H ISTORY OF U.S. O PTIONS T RADING  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

H ISTORY OF I NTERNATIONAL F UTURES T RADING  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

H ISTORY OF I NTERNATIONAL F UTURES T RADING  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...)

H ISTORY OF I NTERNATIONAL O PTIONS T RADING  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

D IFFERENCES B ETWEEN U.S. AND I NTERNATIONAL O PTIONS  Exercise Options  American – Exercised prior to or on expiration date  European – Exercised only on the expiration date  Bermuda/Atlantic – Exercised only on specific dates

D IFFERENCES B ETWEEN U.S. AND I NTERNATIONAL O PTIONS  Expiration/Maturity Date  American – Expire the 3 rd Saturday of every month (closed for trading the Friday)  European – Expire Friday prior to 3 rd Saturday (Closed for trading Thursday)

D IFFERENCES B ETWEEN U.S. AND I NTERNATIONAL O PTIONS  Valuation  American – No general formula  Whaley, Binomial Options, etc…  European – Black-Scholes Model

R ECENT /C URRENT H ISTORY IN I NTERNATIONAL F UTURES AND O PTIONS  1982 – London International Financial Futures Exchange (LIFFE) established by Sir Brian Williamson  1989 – Tokyo International Financial Futures Exchange (TIFFE) established  Deutsche Terminbörse (DTB) founded in Frankfurt (Electronic Exchange)

R ECENT /C URRENT H ISTORY IN I NTERNATIONAL F UTURES AND O PTIONS  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

R ECENT H ISTORY IN I NTERNATIONAL F UTURES AND O PTIONS  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

R ECENT /C URRENT H ISTORY IN I NTERNATIONAL F UTURES AND O PTIONS  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

R ECENT /C URRENT H ISTORY IN I NTERNATIONAL F UTURES AND O PTIONS  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

W HAT ’ S N EXT ?  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

M ERGER T REND

S UMMARY  History of Futures/Options (US)  History of Futures/Options (International)  Key Differences  Recent/Future Events

R EFERENCES        Documents&resultListType=RESULT_LIST&qrySerId=Locale%28en%2CUS%2C%29%3AFQE%3D%28JN%2CNone%2C21%29%22 Michigan+Law+Review%22%3AAnd%3ALQE%3D%28DA%2CNone%2C8% %24&sgHitCountType=None&inPS=true&so rt=DateDescend&searchType=PublicationSearchForm&tabID=T002&prodId=AONE&searchId=R1&currentPosition=8&userGroup Name=s &docId=A &docType=IAC Documents&resultListType=RESULT_LIST&qrySerId=Locale%28en%2CUS%2C%29%3AFQE%3D%28JN%2CNone%2C21%29%22 Michigan+Law+Review%22%3AAnd%3ALQE%3D%28DA%2CNone%2C8% %24&sgHitCountType=None&inPS=true&so rt=DateDescend&searchType=PublicationSearchForm&tabID=T002&prodId=AONE&searchId=R1&currentPosition=8&userGroup Name=s &docId=A &docType=IAC          rent&date=Jul+29%2C+1998&author=Greg+Burns%2C+Tribune+Staff+Writer.&pub=Chicago+Tribune&desc=CBOT+BOARD+AP PROVES+ALL-DAY+COMPUTER+TRADING+BLOW+TO+OPEN+OUTCRY+ON+TREASURY+FUTURES&pqatl=google rent&date=Jul+29%2C+1998&author=Greg+Burns%2C+Tribune+Staff+Writer.&pub=Chicago+Tribune&desc=CBOT+BOARD+AP PROVES+ALL-DAY+COMPUTER+TRADING+BLOW+TO+OPEN+OUTCRY+ON+TREASURY+FUTURES&pqatl=google   

Q UESTIONS ?