In 1972, when investors were getting discouraged with buying and selling stock certificates, the members of the New York Stock Exchange rejected a proposal to expand the vernerable institution's horizons to incude trading in stock options.
The Chicago Board of Trade and the American Stock Exchange, among others, plunged into options trading with vigor. The new business generated a lot of profits for both exchanges.
"It was a mistake," said NYFE Vice Chairman John J. Phelan Jr.
The fastest-growing business in the financial markets today is the futures business. Again the Big Board -- by far the nation's largest and most prestigious stock exchange -- stuck to its equities while Chicago pioneered the business.
But even if the Big Board has been left behind, it has decided not to be left out.
Around April 1, assuming it gets the expected approval from the Commodities Futures trading Commission, the Big Board plans to begin trading financial futures on its subsidiary New York Futures Exchange.
When the New York Futures Exchange opens its doors, it is liable to send shock waves through the futures industry.
Although the NYFE plans to start cautiously -- it wants to trade contracts in five foreign currencies, U.S. Treasury bills and U.S. Treasury bonds -- it already has the other futures exchanges worried, including the two dominant one: The Chicago Board of Trade and the Chicago Merchantile Exchange and its subsidiary International Montetary Market.
Not only will the New York Futures Exchange have the power and prestige of the world's best-known securities forum behind it, but the NYFE plans to bring state-of-the-art electronics to the trading, reporting and surveillance aspects of futures trading.
"We welcome them," said Robert Wilmouth, president of the Chicago Board of Trade. "It's a very big marketplace. There's room for a lot more. There's no doubt they will attempt to take away the lead we've had since 1975. We don't intend to let them do that."
Phelan, who is chairman of the NYFE as well as vice chairman of the stock exchange, talks of achieving a trading volume of "10 percent of the existing market, about 8,800 contracts a day by the fourth quarter of this year."
"That might be wishful thinking," said one Wall Street source well acquainted with both the commodities futures and financial futures business. "Not only are they scrappy and innovative in Chicago, they've also got the know-how and, most importantly, the experienced traders with the capital behind them to keep their markets liquid."
Wishful thinking or not, the rush to buy seats on the new exchange has been overwhelming, according to officials. The exchange had planned on applications from about 400 current NYFE members and 200 nonmembers. The Big Board announced Friday that 980 members and 595 nonmembers had applied for seats on the new futures exchange.
Seats will cost $20,000 for nonmembers and $10,000 for members.
The Big Board has invested nearly $16 million to set up the new futures facility. It is building a trading floor a few yards away from the stock exchange buidling that will be equipped with $6 million worth of computers and other electronic devices that will monitor and record trades on the six trading pits of the new exchange (only three will be in operation on opening day: one for the five foreign currencies and one each for the bills and bonds.)
NYFE officials point with pride to their computerized operations and contend that it will change the way futures (and perhaps all commodities) trading is conducted.
Although traders still will shout out their offers in the trading ring (or pit), all other aspects of the transactions will be recorded on special cards that will feed into NYFE computers.
NYFE President William Smith said the computer system will speed up the time it takes for many orders to get to the pit, match up the buyers and the sellers of the futures contracts, permit the exchange to disclose individual trades and price changes as they occur, reduce errors and increase the ability of exchange surveillance officials to spot trading irregularities.
Small orders that on other exchanges are hand-carried to traders from brokerage firm telephones located off the trading floor will be able to be routed directly to a terminal operated by an exchange employe at each pit, Smith said. That will reduce manpower costs.
The Chicago Board's Wilmouth is skeptical of the high-sounding rhetoric the NYFE puts out about its computerized oerations.
"We've computerized most of out operations and we continue to be the leader in surveillance," he said. "A lot of what they're saying sounds fine until they get into the business.
According to Chicago Board officials, about 13,000 Treasury bond contracts change hands each day and another 9,000 contracts based on Government National Mortgage Association mortgages are bought and sold. Trading volume is about twice what it was a year ago.
Like other commodities markets such as those for grains or precious metals, the financial futures markets grew up to permit businesses and others to hedge, or transfer the risk of interest rate changes and exchange rate changes to speculators.
A financial future is little different in theory from a silver future or a grain future. There are two sides to the contract. The seller promises to provide a certain quantity of, say, Treasury bills, at a certain interest rate at a specified date in the future. The buyer promises to purchase the bills.
The Treasury bill contract that the NYFE wants to trade (which is the one contract Wall Street and Chicago sources think the CFTC might not approve because bills are already traded on three other exchanges) will specify $1 million worth of bills. But to buy or sell the contract requires only a small deposite (called a margin.)
Suppose a business knew it would have $1 million in income next March that it plans to invest in three-month bills and wants to lock in the rate at which bills are selling today.
He then would put in an order to buy March bills at the quoted price. A speculator, who is willing to bet that interest rates will rise, sells a contract promising to deliver bills.
If interest rates falls, the business comes out ahead. If they rise, the speculator comes out ahead, but the business gets the guaranteed rate it wanted on bills.
Smith points to a number of uses to which the financial futures markets can be, or are being, put:
Companies that have to make a large borrowing can guarantee the interest they will pay.
Companies, banks or pension funds that want to guarantee a certain yield on their investment portfolio can buy futures contracts.
Companies that will have an import bill due at some point in the future can lock in the exchange rate they will pay by buying foreign exchanges futures.
Besides the two big Chicago exchanges, financial futures are being traded on the American Exchange, the New York Commedity Exchange and the New York Mercantile Exchange.
With the entrance of a fourth New York market, there is likely to be another push from hard-pressed brokerage firms for mergers among the various exchanges.
One of the most likely candidates for a merger is the American Stock Exchange's Commodity Exchange, where business never has been brisk.
Chicago is not taking it lying down. The Chicago Board has a $35 million project on the books for a 23-story addition to its building.
Even before it sets approval from the CFTC to go ahead with the new exchange, the officials are talking about adding to the seven contracts they hope to start with.
Phelan said the exchange probably will add a GNMA mortgage contract within a few months. He also said he hopes the new futures exchange will break even by 1982.
Wall Street sources say that although the NYFE will have little trouble getting government permission to begin trading, it might be turned down on the Treasury bill contract.
Bill futures are being traded on three exchanges already -- Chicago mercantile, commodity exchange and the Amex Exchange -- and the number of bills around is limited.
Last month, in Chicago, there was a possibility that more bills might be demanded than the Treasury was due to auction. To alleviate the "deliverability" problem, the Amex has proposed a new contract that would permit "sellers" to use a "marketbasket" of short-term Treasury securities to fulfill the contract.