In the early 1900’s, a group of firms set up what was known as the Put and Call Brokers and Dealers Association. The aim of this association was to provide a new mechanism of bringing buyers and sellers together. If someone wanted to buy an option, he or she would contact one of the member firms firm would attempt to find a seller or writer of the option from either its own clients or those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return for what was deemed to be an appropriate price. A market created in this way is known as an over-the-counter market, since traders do not physically meet on the floor of an exchange.
The options market of the Put and Call Brokers and Dealers Association suffered from two deficiencies. First, there was no secondary market. The buyer of an option did not have the right to sell it to another party prior to expiration. Second, there was no mechanism to guarantee that the writer of the option would honor the contract. If the writer did not fulfill his or her part of the bargain when the option was exercised, the buyer had to resort to costly law suits.