Joseph Sullivan’s life impacted so many others, including many or even most reading this newsletter, because of the successful launch he led of the first new securities exchange since the enactment of the 1934 act that created the U.S. Securities & Exchange Commission.
His work paved the way for the U.S. options industry by doing the heavy lifting of creating a new exchange, working with the SEC, which was unsure of the process for how to approve an exchange and somewhat skeptical of the guys from Chicago who were doing it.
One of the lives former Wall Street Journal reporter Sullivan influenced was that of William Brodsky, who would later become the chairman and CEO of the Chicago Board Options Exchange. Sullivan’s marketing of CBOE memberships for $10,000 a piece led the New York brokerage firm where Brodsky worked to buy one and Brodsky to become their approved compliance person.
During a slowdown in trading that was going to negatively impact his bonus at the time, Brodsky was encouraged to “do something” by his wife, he said. What he did helped determine his future career course, and it started with Joe Sullivan.
Brodsky went on to write an article about this new listed options idea, which made him an “options expert” at the time, or what passed for one. He was subsequently recruited by the American Stock Exchange to lead an options startup there to take on the boys from Chicago.
Because of the multiple exchanges starting to trade options, the SEC decided a monopoly of clearing was not the way and forced the CBOE Clearing Corporation to become the Options Clearing Corporation we know today.
Brodsky became the AMEX representative to the OCC board at the age of 31, working with giants of the Chicago markets who were building the CBOE, including Eddie O’Connor, Ralph Peters and others.
What made Brodsky’s job at the Amex easier, he said, was that all the heavy lifting of starting a new exchange, creating a clearing organization and more had been done by Joe Sullivan and the CBOE.
All the existing securities exchanges were grandfathered in when the SEC was created. They had not created any new exchanges until Joe Sullivan and the SEC came along, Brodsky said.
Sullivan would “fight the SEC all the way,” Brodsky said.
At the time, and still today, the Chicago futures trading community remains very wary about being regulated by the SEC. There was no CFTC at the time; it would start in 1974. The way the Chicago Board of Trade would craft the trading “exercise” right rather than give CBOT members a membership was all about not being under the SEC.
Brodsky said Sullivan told him later he did not expect the CBOE to work and it was a “hope and a prayer,” because of the difficulty creating a new exchange and industry.
Options trading had been around Wall Street for a long time but had been an over the counter traded product. There were some firms that would make prices, but it was sparse.
One big difference between Chicago and New York, Brodsky said, was the way one became a trader. In Chicago, anyone was welcome. It did not matter who your father was or what they did. In New York, you could become a “Specialist” on one of the exchanges only if your father was one, Brodsky said.
This also manifested in how the industry was financed, with Chicago firms backing traders. The firm had the money, not the traders. This was another obstacle that Sullivan had to overcome with the SEC. The capital rules at the time looked at how much money was in the exchange trader’s account, not the firm account.
Brodsky told the story of ACE Greenberg, the longtime head of Bear Stearns, which was one of early firms in the options space. He would play cards with prospective traders to see how good they were with numbers. That was his interview process.
Bill Brodsky came to Chicago for a life in the derivatives markets influenced by the work of Joe Sullivan. When Sullivan’s family wanted to let the industry know Joe had passed away, it was through Brodsky.
All of us have benefited from the work Sullivan did to muscle through the hard work of creating this first new exchange, and I for one am grateful for his brilliance, determination and endurance.