The Securities and Exchange Commission voted yesterday to end a nearly-three-year moratorium on new stock options trading that had halted explosive growth in that market in 1977.
The commission voted 4 to 0 to permit a series of steps in which five exchanges that already deal in stock options gradually would expand their business.
An SEC official said just the initial steps might add as much as between 30 percent and 40 percent to the volume in stock options, trade which last year amounted to about 52 million contracts worth approximately $17.9 billion.
General trading in stock options -- a kind of future market for stock -- began in 1973 and grew dramatically until July 1977, when the commission imposed the voluntary moratorium on the exchanges.
The moratorium was triggered by concern that rapid growth had caught exchanges unprepared to deal with the tremendous volume and reports of abuses, including brokers who touted the advantages of options without mentioning the risks.
Stock options allow investors to hedge purchases of stock and reduce risks. For instance, an investor who bought 100 shares of a stock at a certain price also might buy an option to sell it at that price, or higher, for protection if the price of the stock falls. Options trading also had been used for sheer speculation.
During the moratorium a task force studied stock option trading and came up with a series of recommendations adopted by the commission yesterday.
When the moratorium was adopted the five exchanges dealing in options were the Chicago Board Options Exchange, the American Stock Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange and the Midwest Stock Exchange.
At the time of the moratorium there were 225 stocks on which an option to buy at a specified price during a specified period of time (a "call") could be traded. Options to sell ("puts") could be traded only on five stocks at the time of the freeze.
The initial step in the expansion of trade will be to allow the exchanges to add puts for stocks on which they are trading calls. Exchanges have been asked to file with the SEC a schedule for that part of the expansion, something industry sources suggested most exchanges probably are prepared to do almost immediately.
That part of the expanded trading might begin as early as May, said Douglas Scarff, director of market regulation.
In adopting the staff's recommendations, the commission left "a number of crucial issues unresolved," SEC Chairman Harold M. Williams said.
The commission, for instance, deferred a decision on whether to allow the New York trading and whether to permit standardized options to be traded over the counter by members of the National Association of Securities Dealers.
In addition, if exchanges want to add calls to the issues on which they trade options, they must submit a plan for allocating additional calls. The allocation system is necessary because multiple trading (allowing the same options to be traded on more than one exchange) isn't allowed.
The commission also approved a series of rule changes filed by market self-regulatory organizations. Williams said the commission will maintain active oversight of options trading but emphasized the role of the self-regulatory organizations in keeping the market policed.
"We've been anxiously awaiting the moratorium lifting; everybody in the industry has," said John A. Fitzgerald of Merrill Lynn, Pierce, fenner & Smith in New York. The SEC's first step -- allowing exchanges to add puts on stocks for which there are currently calls -- had been anticipated, he said. "It's the right way to go and a sensible first step," he said.
Donald J. Crawford, senior vice president of the Securities Industry Association, said the commission's action "put to rest some reasonably thorny issues," but it also left others unresolved.
Crawford said he expects the exchanges to move rapidly to take the first step. He also said that with puts and calls available on the same issues, he expects there will be more institutional use of options market as insurance on investments.