A Tribute to Leo Melamed - In Honor of the Presentation of the 2005 CME Fred Arditti Innovation Award.
April 20, 2006

by
Myron S. Scholes
Nobel Prize Winning Economist

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Leo Melamed

Leo Melamed is this years' recipient of the CME Fred Arditti Innovation Award. A week before Fred Arditti passed away, he called me and asked how this year's award selection was coming along. In no time flat he steered the conversation to Leo Melamed as being the ideal candidate. I had to bridle his enthusiasm and let him know that the CME Competitive Markets Advisory Committee, had already decided to select Leo for the award. We then went on to talk about ideas and finance, and, in particular, his passion, the Chicago Mercantile Exchange. Although that was the last time I would have the pleasure to talk with Fred, I listened to many tributes to him at his memorial service, and every year on this great occasion, we will be able once again to honor Fred Arditti through making excellent award selections.

One of the important responsibilities of the CME Competitive Markets Committee (CMAC) is to select each year's recipient of the Fred Arditti Innovation Award. The selection of this year's award winner was unanimous. The outside members of the committee include Professors Gary Becker, Jack Gould, Robert Merton, and Robert Schiller, and David Hale and me a retired professor, an outsider and an insider since I am on the CME board. Many committee members are in the audience this evening. CMAC benefits tremendously by bringing together this diverse group of independent thinkers to broaden our orientation.

The committee easily recognized Leo Melamed as an innovator. He could define "innovation." An innovator creates change by observing and anticipating customer demands for products and services. An innovator realizes that change is possible because of changes in infrastructure or institutions such as computer or telecommunications technology, or new models (ways of thinking), new understanding and because of chaotic events. An innovator realizes that new products and services can be produced profitably.

During the 1960s, Leo Melamed realized that the new customers and products of the CME would be found in servicing the needs of the financial sector and moved a moribund exchange for trading storable commodities into a thriving global exchange with a diverse product base. He was elected to the Board in 1967 and became its Chairman in 1969.

He saw that the growth of the exchange depended on financial futures. The shock and opportunity came in 1972 with the collapse of Brenton-Woods agreements that culminated in the launch of the International Monetary Market in 1972, with futures on financial currencies. An innovator does not only dream of new products or services but also implements them and sees the dream to fruition. As Tom Russo will tell us, Leo Melamed worked tirelessly to convince regulators, governments, and a new customer base of the efficacy and importance of financial futures, including in addition to currencies, interest rate and equity-based index futures. And, he directed the exchange to cement the necessary regulatory approvals, licenses and support to enhance the position of the exchange in making the dream come true.

To my chagrin, Merton Miller, my dear mentor at the University of Chicago, anointed financial futures (and not options) as the financial innovation of the twentieth century. And, Leo Melamed is the father of financial futures. Leo has always agreed with Merton's designation.

With financial futures, governments, corporations, financial entities, and individual investors learned to transfer generalized risks such as interest rate, or currency risk, and, as a result, enhanced value for themselves and their clients. The products and services offered by financial institutions changed as a result of their new ability to transfer generalized risks. As former Chairman Greenspan correctly pointed out, as the channels to transfer and hedge risks in our global economy have expanded, our economy has become more able to absorb shocks. Financial futures have become part of investor strategy.

Leo did stop innovating with financial futures as a great innovation. He realized that computer and telecommunication technology would allow for global trading in markets and allow the CME to expand its offerings and build new products to serve an expanded client base. Globex was born in 1987. This leap into electronic trading required vision, perseverance, large cost, and an unbending faith and a willingness to change how customers, and the exchange interacted with each other, in addition, to how regulators viewed their role. This is another crowing achievement.

Liquidity pools have always become central to the functioning of an exchange. With Globex and the movement to electronic trading that it fostered, liquidity pools no longer need be centralized on the floor of the exchange. Bid-offer spreads have fallen dramatically and with more efficient pricing the use of financial futures has grown dramatically over the years.

On a personal note, I first met Leo in the late-70s, when the CME was considering honoring Leo by funding a chair in finance at the University of Chicago. Leo came to the University for lunch and in his usual manner asked why the CME should fund such a chair. Our response was that with financial futures our interests were more aligned than with commodity futures. We too saw the growth potential of financial futures.

I have become friends with Leo and Betty over the last number of years. He is a nice guy to boot. He has a good sense of humor and a warm heart. I am not sure we can say that about all innovators. And, as a friend, I am privy to the way Leo thinks about financial markets and the role of the exchange in those markets. Leo also sees how globalization will change the way we trade. He is always innovating. New products and services, new ways to use infrastructure to add value for clients are always on his mind. We established the CMAC to understand innovation and change or at least to anticipate change. An innovator realizes that the old comfortable path might not be the best. An innovator knows when to leave the path and strikes out anew. I did not have the honor to be close to Leo in the 70s and 80s, but I can well imagine the force of innovation. I see it so clearly in him now. I expect that we might have to honor him once again in ten years or so for his next innovations.

I am proud to honor Leo Meland as a recipient of the Fred Arditti Innovation Award. In honoring him, as is always the case with regard to Leo, he enhances the value of our award.

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