On Thursday I was pulling some links together on the British experience regulating derivatives after the South Sea Bubble of 1720. Lo and behold what pops up this morning but a link via Alphaville to the Economic History blog. Just one quibble, Dr. Murphy states that Barnard's Act* was dated 1737, I'd swear that my memory puts it earlier.
[just how old are you? -ed]
From the Economic History blog:
Murphy, Anne L. (2009) Trading options before Black-Scholes: a study of the market in late seventeenth-century London. Economic History Review, 62/1: 8-30.HT: FT Alphaville
The ledger of the financial broker Charles Blunt contains the details of some 1,500 transactions realized between 1692 and 1695, about a third of which regard the then novel trade in equity options (p.9). The technique had arisen in the 1620s in the commodity market and was proving very useful in the decade following the Glorious Revolution, when some 100 joint-stock companies were floated in London (p.10). During the boom of the early 1690s, it is likely that “several thousand derivatives were transacted each year”.
Four out of five options traded were calls (i.e. the right to pursue a share at any time during a given period, usually 6 months) and at-the-money (i.e. for the price of the share at the time of the agreement). “It is likely that they were transacted to take advantage of an anticipated price move associated with a specific future event” (p.12). Most of Charles Bunt’s clients were not professionals, for them using a broker was the only way to find a buyer. However many of these amateurs did in fact engage in option trading.The purchase of an option was often perceived as a sort of insurance as one ventured in a new company (p.14) or foresaw coming troubles. In this case the sellers’ premium really acted as an insurer’s fees. It was understood however that the safety offered was not complete and one could takes losses (p.16). Moreover, options offered a speculator’s the opportunity to take position without paying the full amount of the shares upfront, a welcomed characteristic in time of monetary instability. It was also a good way to preserve one’s profit....MORE
“It is important to acknowledge the diversity of those who dealt in options. A market cannot exist unless it attracts participants with varying needs and attitudes towards risk, nor will it survive if it cannot accommodate those needs.”
*Barnard's Act, which outlawed the use of options and forwards to purchase stock, was enacted in 1734 and due to sunset in 1737. Instead it was made perpetual and not repealed until 1860.