CHICAGO TRIBUNE

CME Group legend Leo Melamed, who modernized Chicago trading, is retiring:
'Risk was really a part of my being'

By Robert Reed, Friday, February 16, 2018

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Leo Melamed, chairman emeritus of the CME Group, who is retiring from the exchange after a decades long career, is photographed in his office Feb., 13, 2018.
(Abel Uribe / Chicago Tribune)

Leo Melamed likes a good drag race.

As a young man, Melamed would put pedal to the metal to his new Corvette and fly along a stretch of open road in Indiana, just over the Illinois border.

"It was a great car," the 85-year-old says wistfully. Melamed, who will soon retire from the board of trading giant CME Group, is no stranger to risk-taking or the need for speed. He's courted both throughout his long, illustrious and occasionally controversial career as the futures exchange's world-renowned leader.

Even those who don't know what CME Group actually does have probably heard of Melamed. On top of being a driving force for modernizing and expanding the Chicago exchange, the longtime CME chairman emeritus is also a futures trader, lawyer, government adviser, avid free market enthusiast, recipient of international awards, sci-fi author, former Yiddish-speaking theater performer and a cat person.

"Cats are smarter than dogs," Melamed asserts. "Call a dog and he'll come to you. Call a cat and he'll come by, but in a certain way and give a look that says, 'What the hell do you want?' "

Such wry observations are among the insights Melamed shared this week as we discussed his life and decades-old effort to turn the CME into a global financial powerhouse. During a nearly 2½-hour lunchtime conversation at his downtown office, Melamed would periodically pause to check the market and execute a trade, even while munching on a turkey sandwich.

Basically, a futures market is an auction place that enables traders to buy and sell agricultural, financial and other contracts for a price set at a future date. Buying and selling occurs all the time and traders seek to make money on those price fluctuations.

Being a trader was the farthest thing from Melamed's mind in 1952, when he was a student at John Marshall Law School and searching for a part-time job. A friend mentioned an opening at Merrill Lynch, Pierce, Fenner & Beane. Any title with so many names had to be a law firm, Melamed assumed.

He was quickly dissuaded of that notion upon being hired as a "runner" for the investment house's trading team at the Chicago Mercantile Exchange. His job, which paid $25 per week, was literally running the firm's orders to a trading clerk and back. For many young people being a runner was the first step toward a trading and finance career.

At the time a membership organization with a few hundred people, the Merc specialized in offering contracts for eggs, butter and other agricultural goods. It used large blackboards to tally up pricing. Some floor traders stood on wooden crates to see the numbers and survey the action.

"I fell in love," Melamed said. "By the time I graduated (from law school), I had a membership in the Merc. I knew I was going to be a trader."

He worked at the Merc half-time while also hanging out a shingle to practice law with a partner for six years. His firm handled basic legal fodder including divorces, bankruptcies and personal injury cases. It was a nice living, enough to buy that flashy Corvette.

I asked Melamed what compelled him to leave law, where an attorney is trained to limit risk when making agreements, and leap full-time into futures contracts, where fortunes are often won or lost in less than a day. Wasn't he worried?

"Risk was really a part of my being," said Melamed, who links that trait to his family's flight from the Nazis and the Russians during World War II.

Melamed, along with his mother and father, were forced to flee their home in Poland — his mother was beaten by the Gestapo, who had come looking for his father, he recounted. But they outfoxed the Nazis and the Russians by embarking on a hazardous and daunting escape plan that took two years and spanned three continents. In 1941, the family came to the U.S., eventually arriving in the Chicago area.

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Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange, who is retiring from the exchange, which he helped start, stands for a photo in his office's president's wall, Tuesday Feb., 13, 2018. (Abel Uribe / Chicago Tribune)

For Melamed, the Mercantile Exchange also became his home. By the late 1960s, the membership elected him chairman and he's been in a leadership role ever since.

Like many Chicago-based institutions, the Mercantile Exchange has endured significant change, including merging in 2007 with its longtime futures rival, the Chicago Board of Trade, to form CME Group.

Melamed, however, will probably be best remembered for his significant, albeit disruptive, crusade to replace the exchange's raucous "open outcry" system with the sterile silence of computer-based trading.

Chances are you've seen video of the open outcry world — a frenzy where hulking and aggressive traders, are scattered about a large floor in various "pits." They scream, shove and wildly gesture with myriad hand signals to execute trades. It's a show of testosterone worthy of an NFL locker room, and the din of open outcry could match the crowd noise of a large sporting event.

Merc purists, which for decades included Melamed, saw open outcry as the embodiment of the free market in action.

Yet around 1986, Melamed recognized time and technology were rapidly changing and that computers could make trades at a faster, less expensive and more efficient pace than the people working in the pits.

Thus began his a near 15-year trek to fundamentally change the Merc's trading system.

As you'd expect, this was not a universally popular move with the membership, particularly those who feared the switch would destroy their livelihoods. At one point, Melamed told me, there were death threats that required him to have police protection.

"It was the hardest thing I've ever done in my life," Melamed recalled. "But if we didn't do it, the Merc would have died."

When asked if he felt responsible for the brokers, traders and staffers who did lose their living because of the push into new technology, Melamed responded with an answer that echoed the free market philosophy of his hero and friend Milton Friedman, the famed University of Chicago economist and Nobel Prize winner for economic sciences. (Friedman died in 2006).

"I don't worry about what it replaces. The world makes the decision … all you have to do is give the world a choice," Melamed said.

Yet I believe the demise of the 150-year open outcry method is also bittersweet for Melamed.

In a documentary called "Futures Past" that was directed by his son Jordan, a former trader, Melamed is shown on the trading floor during the last day of open outcry in mid-2015. He walks, talks, laughs and reminisces with longtime comrades-in-arms. One trader says it's the closing of the "House of Leo."

(Throughout the film, the Melamed family cat makes guest appearances.)

"Without Leo, we would not have the modern-day CME," Terry Savage, a local business journalist who is also a veteran member of the exchange's board of directors, told me.

Like I mentioned, CME remains an obscurity for many people. The Economist magazine once described it as the "biggest financial exchange you never heard of."

Yet the CME is an international trading force with a market capitalization of $55 billion. It is a futures and derivatives dynamo handling over 3 billion contracts annually, worth a whopping $1 quadrillion, according to CME, and employs about 2,700 workers in Chicago and elsewhere.

Melamed was quick to point out during our conversation that fellow board member Jack Sandner, who has been a dominant presence at the exchange for 45 years, has been crucial to the CME's success. In May, retired chairman Sandner is also leaving the CME board.

Both will be company consultants and neither are departing the CME empty-handed.

For example, Melamed, who retains the title of chairman emeritus, will get $1.3 million annually for the first two years of retirement and $300,000 a year afterward, according to a Securities and Exchange Commission filing. Sandner gets $1 million for his first two years of retirement, according to the SEC.

As our conversation was wrapping up, I asked Melamed his thoughts about retirement but didn't quite get a direct answer.

Instead, he mentioned he'd continue to trade and advise the CME while working on an assortment of academic and industry linked projects.

He's already written a number of books, including a science fiction tome ("The Tenth Planet"), so maybe another such project is in the wings. He's also a pretty good bridge player.

"I got emails that said, 'You're too young to retire,'" he said.


 

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