Bloomberg News

Mathew Gladstein, Options Guru With Merton, Scholes, Dies (1)

June 20, 2013

Mathew L. Gladstein, a Wall Street executive who tapped the expertise of Robert Merton and Myron Scholes -- future Nobel Prize-winners -- in the 1970s to bring options trading to the masses, has died. He was 90.

He died in his sleep on June 18 at his home in Scarsdale, New York, his daughter, Gina Gladstein Mullen, said yesterday in an interview. Known as Mike, he had lived in Scarsdale since 1951.

Gladstein joined Donaldson Lufkin & Jenrette, the New York brokerage known for devising new ways of delivering financial services, in 1970 to pursue a budding interest in trading options -- contracts that give the buyer the right to buy a security or commodity at a later date for a specified price. The Chicago Board of Trade was then working on the first centralized marketplace for trading options; it would open in 1973 as the Chicago Board Options Exchange.

Hoping to set up an options desk at DLJ, Gladstein enlisted Merton and Scholes, economists at the Massachusetts Institute of Technology who were developing mathematical models to determine prices for options.

The trio established option pricing and hedging formulas that DLJ used in markets worldwide, including the CBOE. They also established Money Market/Option Investments Inc., the first public mutual fund with a strategy focused on options, according to Merton.

‘Meaningful Role’

“Gladstein clearly played a meaningful role in the development of the option market and its transition from a fragmented, slow-paced, over-the-counter market to a public-traded market which, 40 years later, has grown enormously in both volume and breadth,” Merton said yesterday in an e-mail.

Scholes, in an e-mail, called Gladstein “a pioneer in the pre-CBOE era” who “was successful in combining models with intuition in trading options.”

On the first day of CBOE options trading in 1973, Gladstein monitored the prices of calls and panicked when he realized they were much higher than Scholes and Merton had predicted. As Gladstein later recounted to Donald A. MacKenzie for the 2007 book, “Do Economists Make Markets?” he called Scholes, who, after huddling with Merton, gave assurance that the prevailing prices would move toward what their model predicted.

Gladstein said he “ran down the hall” and demanded of his colleagues, “Give me more money, and we’re going to have a killing ground here,” according to the book.

Four years later, Gladstein teamed again with Merton and Scholes to popularize the use of options.

Simulated Investments

In a series of simulations, the three men found that options, when combined appropriately with other investments, enable investors “to create patterns of returns” not reproducible by trading in stocks and bonds alone, they wrote in a 1978 paper published in the Journal of Business.

“As we see it,” they wrote, “the principal function of options is to provide a significant expansion of the patterns of portfolio returns available to investors. Such expansions make investors better off and add to the liquidity and efficiency of the capital markets.”

That same year, Gladstein was elected president of the New York Institutional Option Society, a trade group newly established to promote the use and understanding of puts, calls and other security options.

Merton’s research expanded on the Black-Scholes method -- a term he coined -- for pricing options. For this pioneering work, he and Scholes shared the 1997 Nobel Prize in economics; Fischer Black, Scholes’s research partner, had died in 1995 and was cited by the Nobel committee as a contributor.

Math Rush

The Black-Scholes model “worked so well that Gladstein and his pals made tons of money using it,” Ajit Balakrishnan wrote in his 2012 book, “The Wave Rider: A Chronicle of the Information Age,” and it “started the rush of mathematicians to the stock market.”

Mathew Louis Gladstein was born on March 24, 1923, in New York City, the first of two sons of Samuel and Jeanette Gladstein. After graduating at 16 from Townsend Harris High School, he attended City College of New York for two years before enlisting in the U.S. Army Air Corps, forerunner of today’s Air Force.

During World War II, he served as a bombardier-navigator with the 15th Air Force in Italy, rising to first lieutenant.

He resumed his studies after the war at Columbia University in New York City. Following a stint as an insurance broker, he became president of Glenhaven Ltd., a women’s clothing manufacturer that had been started by his father-in-law.

At DLJ, he reported to Leo Pomerance, who would go on to become the first chairman of the CBOE.

Following his retirement, Gladstein remained interested in the markets and traded for his own account until his death, his daughter said.

Survivors include his wife of 63 years, the former Edythe Rosenthal; three children, Gina Gladstein Mullen, John Gladstein, and Joshua Gladstein; and two granddaughters, Anna Mullen and Nina Mullen.

To contact the reporter on this story: Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editor responsible for this story: Charles W. Stevens at cstevens@bloomberg.net


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