An Economic Evaluation of Organized Options Markets

Throughout their history, puts and calls [1] on common stock have been criticized as mere gambling opportunities. Recently, the creation of listed options on the Chicago Board Options Exchange, the American Stock Exchange and three regional exchanges in the United States, has given new respectability to options as investment vehicles. By year-end 1977, listed options to 217 common stocks were available. Even though the market value of these optioned equities comprised about sixty percent of the market value of all New York Stock Exchange stocks, even though the listed options market had been in existence for only four and a half years, and even though most financial institutions are precluded from certain types of option investments, for the calendar year 1977 listed options trading volume (in terms of share equivalents) had grown to seventy-five percent of the common share volume of the New York Stock Exchange. This unexpected growth in options trading, a general concern that incentives for fraudulent investor behavior may be significantly greater in the listed options market than in the stock market, doubts about the surveillance capability of options exchanges and brokerage firms, and a fear that options might adversely affect the price and volume of the underlying stocks or draw "risk capital" away from unseasoned new equity issues or venture capital, motivated the Securities and Exchange Commission, in July, 1977, to request a "voluntary" moratorium on the expansion of the listed options market. Securities and Exchange Commission Release No. 34-14056, which proposed on