Rosenthal: Of options, change, exchanges and exits

The hall outside CBOE Chairman and Chief Executive William Brodsky's office is lined with his personal collection of photos and other artwork of various trading exchanges around the world.

"This is very special because it's capturing almost 400 years of exchanges, when they were cathedrals of commerce that had personalities," Brodsky, 68, told a visitor Tuesday in his office, a pragmatic seventh-floor perch with a less-than-stately view of Chicago's huge, empty, onetime main post office.

"I was at the Brussels exchange in September," he said. "You should see that building, with the Rodins in it and just breathtaking. It's not going to be like that. So I'm capturing what was a slice of commercial history. … My newest picture I got the other day. It was from the Warsaw exchange. Guess what it is. It's a modern office building. It's nondescript. Things move on."

Things do. So do people.

Brodsky — a pivotal figure in this nation's derivatives industry for close to 40 years, much of that time riding herd in Chicago, first with the Chicago Mercantile Exchange and almost the last 16 years leading Chicago Board Options Exchange — said last week that he intends to do so in May, a move long telegraphed.

CBOE President Edward Tilly, 49, will move into the CEO post, while business development head Edward Provost becomes president and chief operating officer. Brodsky, whose many transformative actions as head of the largest U.S. options exchange included taking CBOE from a member-owned operation to a public company with a 2010 initial public offering, will assume the title of executive chairman.

The goal, Brodsky said, is to ensure a smooth transition for the sake of the institution and its stockholders, although there have been murmurs that the Obama administration might tap him for a government role, perhaps with the Securities and Exchange Commission.

"There's been speculation about that for years and I've done nothing to fan it because my real focus has been to do the job here," he said. "Whether and when I would do government service is something I'll look at down the road. I'm not going to look at it right now.

"I have a whole bunch of friends in this administration, including that guy there," Brodsky said, gesturing toward several photos, including one with a handwritten note from President Barack Obama. "(Vice President Joe) Biden and I went to law school together, and Valerie Jarrett and I have been friends for 20-some-odd years. If it were a different administration, it probably would not be a consideration. But this is not the top of my mind right now. The top of my mind is to make sure we have a good transition here."

Transition has been a hallmark of Brodsky's CBOE tenure. He has taken the exchange into the electronic era of high-frequency trading, shepherded development of proprietary trading products, such as VIX, the index of market volatility, and raised CBOE's profile overseas with plans to initiate a London trading hub in 2013.

"What I have loved about the business is that the only constant about the business since the day I got into it has been change," he said. "The constant has been change. For me, that's what keeps me going. … This business has got a lot of smart people and the people that succeed are those that adapt."

Along the way, the culture has changed too. Runners jobs — like the one in which his career began on the floor of the New York Stock Exchange — that brought street-savvy but not necessarily honors students into the business have largely been automated out of existence.

"It's all part of the technological revolution," he said. "I don't know if it's bad. It's different."

Brodsky said it isn't that he is a proponent of high-frequency trading, or HFT. "It's that I'm a pragmatist," he said, comparing the technological advantages some may enjoy to those who had private wire access to trading markets a half-century ago.

"What we're talking about has been a dramatic transformation in the business," he said. "People who criticize the current situation never say that what we had 10 years ago was so wonderful. … Ten years ago, I will tell you, the specialists at the New York Stock Exchange had an inordinate amount of power over the pricing of stocks."

If there are problems with HFT, then he would like to see them fixed. Ditto for oversight of exchanges, although Brodsky says there must be some self-regulation because he doesn't believe the government will ever have the resources or knowledge to do it adequately on its own, no matter how much it tries to step up enforcement.

"Has the SEC tightened the level of scrutiny on us? Dramatically so. But that's not bad, as far as I'm concerned. The reality is it's been a very dramatic change because they're under pressure," Brodsky said. "The SEC was so embarrassed with (Ponzi schemer Bernard) Madoff that they made a major initiative on insider trading and other things. That's fine. But again, if you've been in the business as long as I have, there have always been scandals."

It troubles Brodsky that investor confidence is down. Some attribute the decline to instances of insider trading, market manipulations and software glitches that have disrupted trading. Part of the blame, too, he said, should be on a lack of financial literacy among the public, which should be in the market for the long haul, not the quick buck.

"The individual investor in this country has more legitimate information available to them, at cheaper prices and better access (to markets through) websites and everything else, than (he or she) ever did," he said. "If they were only properly trained, they'd be incredibly well-positioned to fend for themselves. … The vast bulk of people should be investing in a group of index funds or mutual funds and they should be holding them for 30 years."

Brodsky pointed to a product CBOE has developed that effectively enables investors to make use of what's known as covered calls to minimize the volatility of their portfolios. But obviously that requires a certain sophistication to evaluate and perhaps execute as part of an investment strategy.

"We've made options mainstream," Brodsky said. "When I look back on my tenure, options have become a respectable way for serious investors to enhance the returns of their portfolio and institutions. … If we can do that, we have enhanced the value of equity markets in the United States, and it all came from this building and it continues to come from this building."

But what a picture of it will look like in a few years hence, even he can't say.

philrosenthal@tribune.com

Twitter @phil_rosenthal

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