CBOE Chief: “Make More Mistakes”

Edward Tilly, despite his success, is still at heart a floor trader; he dominates a room, dictating involvement, capturing his audience, making them want to buy his confidence and swagger. His presentation was at some points humorous, at times remarkably straightforward, and all the while Tilly broke down the complex, sophisticated economic principles he works with into basic terms for the sake of his high school listeners.

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His path through life, however, has been less simple; a path not straight but rather crooked, curving, twisting as his success rose. Tilly started at Albion College, but transferred to Northwestern after two years (during his presentation, it was revealed that he might have encountered a certain ETHS business teacher’s field-hockey-playing relative while he was there). As an NU student, he earned his B.A. in Economics, and began his working life as a floor trader.

A Scene on the CBOE Trading Floor

“Eat what you kill; if you make money, great, if you don’t, you starve,” were Tilly’s words of introduction to floor trading. This piranha-type connotation soon dissipated, as Tilly described floor trading as having a, “7th grade boys locker room” mentality, which made the male members of the Investment and Business Club smile. Their smiles would soon widen, as Tilly revealed that the typical day of trading was from 8:30-3:30, and that most men were on the golf course by 4. It seemed like a fulfilling, competitive job; one that, back in Tilly’s time, was ruled by those who had a knack for statistics.

Following his rosy description of what a floor trader’s life is like, Tilly elucidated how the CBOE operates. Members owned seats, which equated to portions of ownership in the exchange. In many ways it operated like a country club. However, as the twenty first century approached, a change was coming, bubbling and festering as technology continued to innovate. Traders saw it coming, but many were unwilling to give up the lifestyle they were accustomed to, the days spent trading and the afternoons on the links. Tilly realized as this change approached, progress could not be stopped, and he had to either embrace change, adapt, and prosper, or put his hand in the sand and be crushed by the rising tide of technological advancement.

Tilly adapted, and he helped his fellow traders adapt as well. Following an unsuccessful campaign, Tilly was finally elected as a member of the board to represent the members of the CBOE. This leadership role presented Tilly with another decision that would again determine the path of his life: how would he manage to lead his fellow traders? At this juncture of the presentation, Tilly gave an inside-look at how he slowly but surely morphed from a regular trader into the leader he is today. He never stopped asking questions. He communicated, communicated more, and then continued to communicate; his lesson to Investment Club members is that there is no such thing as over communication.

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His leadership skills have served him well; Tilly was named CBOE President & Chief Operating Officer, and now he is the Chief Executive Officer (CEO). Under his guidance, CBOE has gone from being a privately owned company to a public company. Tilly talked his high school audience through CBOE’s IPO [Initial Public Offering] process, which was unique in many regards. Whereas most companies go public in order to raise capital, CBOE went public so that their owners could more easily divvy up their seats. In fact, according to Tilly, after the company went public, they used the raised capital to purchase stock, basically saying to investors, “thanks, but we’re good.”

A chart of CBOE's Stock Price
A chart of CBOE’s Stock Price

Besides showing the Investment Club members the real story of an IPO, Tilly spoke specifically about his role in running a publicly traded company. As CEO, he is in charge of strategy for the exchange. Each day he is trying to make sure CBOE’s stock beats the S&P 500 [an indicator of how well the largest 500 companies in America are doing]. In addition to strategy, Tilly works to expand the CBOE. Sure, Chicago Board Options Exchange is great in Chicago, but he works to globalize it, so that people in Tokyo, Munich, and Zurich know what the CBOE is.

As Tilly continued, his confidence oozing outward onto his A241 congregation, he spoke of one particular aspect of the CBOE that has been a key to their success: VIX. It’s a volatility index, which gives the likelihood that a stock will change. VIX measures the market’s blood pressure, in a sense; companies use it as a hedge to try to eliminate tail risk, the unlikely risk that a stock will move significantly in a negative direction. For interested listeners (and Tilly’s presentation demanded interest), he recommended a book by Nassim Taleb titled Black Swan.

A chart of the CBOE Volatility Index (VIX)
A chart of the CBOE Volatility Index (VIX)

The presentation drew to a close, and Tilly went row by row, engaging his listeners, asking for questions to be asked, wanting to do what he could to impart knowledge on the young aspiring entrepreneurs that sat before him. He debunked the Dow Jones, deeming it the ticker known by “Joe Public” but not actually useful to investors. He argued on behalf of diversification, and balance, and talked about the two regulating bodies of the U.S. economy, the SEC and the CFTC. Among his final words were his instruction to his audience to make more mistakes. One mistake they surely didn’t make, however, is coming to hear him speak.

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This post was written by Ben Osterlund. Photos by Ben Silverman (check out http://www.bensilv.com/) Edits by Noah Silverman.

 

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